Advanced Micro Devices, Inc. (NASDAQ:AMD) stands at a crossroads. AMD stock has been an investor battleground all year, and pressure continues to mount. Short sellers are throwing record short positions against the stock, and yet shares are holding strong.
On the other hand, AMD needs to start delivering better financials. There has been plenty of excitement about product launches all year. But at some point, AMD needs to convert the hype to dollars and cents. Octo. 24 could be the day this rising tension explodes into a massive move on AMD stock, as it reports quarterly earnings. At the risk of sounding extreme, I think there is a solid chance AMD stock will be trading either north of $15 or under $10 by the end of the year. Which way will it go? Here are the pros and cons to consider heading into the pivotal earnings report.
AMD Stock Cons
Expensive Stock: AMD has a lot to prove. Despite all the new launches in 2017, revenues have hardly moved yet. On a trailing 12 month basis, revenues are up less than 10% compared to 2016’s figure. And AMD has brought in fewer sales over the past 12 months ($4.6 billion) than it did as recently as full-year 2014 ($5.5 billion).
Now, it’s reasonable to expect significantly strong results over the next year. But will they be good enough? The company is selling at more than 50x forward earnings, along with 31x book value and almost 3x sales. Even for a rapidly-growing company with strong profits, that’d be a stretch. For embattled AMD, which has struggled for a decade now in Intel’s shadow, investors have some downright lofty expectations for AMD’s future results.
Intel’s New Chip: The AMD stock price declined, along with Nvidia Corporation (NASDAQ:NVDA) a few weeks ago following the unveiling of a new generation of the Intel Corporation (NASDAQ:INTC) i7 core chips.
Intel is specifically going after the gaming market with this one, offering an integrated chip powerful enough to satisfy many casual gamers. On benchmarking tests, Intel’s new chip appears to be ahead of AMD’s top-performing Ryzen alternative. AMD supporters suggest that Intel’s chip consumes too much power, but we’ll see if that flaw is sufficient to detract from its performance advantage.
Hard To Keep Up: AMD has certainly scored some technology wins against Intel this year. In fact, you could reasonably argue that AMD is at its strongest competitive point against Intel in the better part of a decade.
This technological parity may not last long though. It’s worth remembering that this is a David and Goliath battle. Intel spent almost $13 billion on R&D last year. AMD, by comparison, just $1.0 billion. Intel is currently stinging from some underperforming new product launches. But AMD can’t get comfortable here, Intel will hit back hard and fast to make up for its shortcomings this product cycle.
AMD Stock Pros
Crypto-Boom: The ongoing rise in cryptocurrencies has made a lot of people (including this author) look foolish. I thought Bitcoin was topping around $3,000, and yet you blink and it’s trading another 60% up. In fact, a move over $5,000 appears imminent.
With that in mind, AMD is positioned perfectly. As the saying goes, in a gold rush, sell shovels. AMD has the cards needed to pursue crypto-mining dominance. While I’m still convinced these cryptocurrencies will eventually crash, they’re certainly kept running longer than I expected. Each quarter they power higher, expect to see AMD make a fortune on hardware sales.
Short Squeeze Potential: AMD stock continues to be hounded by bears. And so far, it’s not going very well for them. After AMD’s rally to $15/share early this share, AMD stock price slid to $10, and it appeared short sellers would get a chance to cash in. Since then, though, the bet is heading in the wrong direction. AMD has consolidated and now looks strong technically.
That’s problematic for the bears, given that they’ve been doubling down on their bet. Short interest in AMD stock crossed 100 million shares in February. Through April, it slowly climbed to 120 million shares. In May, short interest spiked up to 158 million shares, as the AMD stock price slumped. Once it started to recover, bears covered some of their position. They’re adding again now though, with short interest climbing back to that 158 million share level again. With the stock only about 10% away from the key $15 resistance level, there are more bears than ever who could get caught flat-footed in a rally.
Autonomous Upside: Last month, CNBC reported that AMD would be securing a contract with Tesla Inc (NASDAQ:TSLA). Analysts from Jeffries and Rosenblatt both chimed in supporting AMD stock in the wake of the news.
AMD can validate its technology by winning this contract in an area where analysts suggested that the company couldn’t compete. So far, it’s still just rumors, with one of AMD’s partners denying any firm deal is in place with Tesla. However, should it come to fruition, it could provide a real spark for AMD stock.
The AMD stock price promises more volatility going forward. Bears have strong long-term arguments. AMD hasn’t been successful in a very long time, and there’s good reason to think Intel will regain its technological superiority sooner or later. And despite an epic boom in cryptomining, AMD hasn’t yet become meaningfully profitable.
While all these bearish arguments are correct, however, AMD stock could easily rip to new 52-week highs after earnings in October. The massive short interest is powder keg. One good quarter would power the momentum. AMD is in growth mode, and bulls will stampede the bears if the quarterly results are halfway good. While I don’t have enough confidence to bet on the AMD stock price to rally here, I’d be downright terrified of shorting it ahead of earnings.
At the time of this writing, the author owned INTC stock and had no positions in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.