It doesn’t take an experienced technical analyst to see that Advanced Micro Devices, Inc. (NASDAQ:AMD) stock is running into resistance. Twice this year, AMD stock has made a run past $15 only to hit a wall.
Now, it’s doing it again ahead of AMD earnings next year. Both of the share’s earlier trips above $15 ended quickly — and with good reason. AMD stock has earned every bit of its 600%+ run from early 2016 lows. But now the road is much tougher and I’m skeptical there’s a catalyst that can help the shares break through that resistance any time soon.
AMD Stock Is Running Out of Catalysts
Without a doubt, Advanced Micro Devices has executed one of the most-impressive turnarounds in recent memory. CEO Lisa Su has transformed the company from playing second fiddle to Intel Corporation (NASDAQ:INTC) in a declining PC space to a diversified chipmaker with offerings in GPUs and datacenter chips.
The Ryzen CPU line has driven huge market share gains, as our Brad Moon pointed out in July. Vega GPUs are challenging NVIDIA Corporation (NASDAQ:NVDA) in high-end gaming, with some success. The June launch of Epyc processors — which should take some of Intel’s near-100% share in that space — drove AMD stock higher, helping it recover from an ugly Q1 report.
The problem for AMD stock, though, is that all these launches aren’t yet translating into earnings growth. You see, 2017 consensus EPS estimates still sit at about 10 cents while 2018 numbers are at 32 cents. AMD itself is targeting 75 cents a share by 2020.
Intuitively, then, it’s not hard to see why $15 might present a psychological barrier. At that level, investors are paying 20x 2020 earnings for a stock that, recent performance aside, hasn’t entirely proven itself yet.
There is optimism surrounding the new launches, admittedly. But there’s also going to be stepped-up competition in return, most notably from Intel, which hasn’t had to work that hard to maintain its dominance. The long and continued bull run in NVDA stock suggests investors aren’t terribly worried about that company losing market share. If investors are betting just on the recent launches to push AMD stock higher, that is a tough argument to make from a fundamental standpoint.
AMD In The Sweet Spot
So, I think Advanced Micro Devices needs something more than it has to offer right now.
Modest market share gains will help. But the pricing needed to get those share gains is a concern. Remember, the post-Q1 plunge came in large part due to AMD’s gross margin guidance, which raised fears of a race to the bottom in pricing and lower margins for AMD stock longer-term.
Meanwhile, there are some current tailwinds helping AMD which may not last forever. Bitcoin mining has boosted sales for both AMD and NVDA. That demand driver likely lasts into 2018 — but not forever. Overall gaming growth has been a help, not just for chip stocks, but for accessory manufacturer Logitech International SA (USA) (NASDAQ:LOGI), whose stock is up ~150% since last July. Even PC sales of late have been much better than expected, stabilizing after a rough few years.
AMD stock is in a bit of a sweet spot. External factors are mostly positive. Recent product launches are new enough to drive hopes higher, as the impact of several key products hasn’t been seen in AMD earnings yet. Sentiment toward the overall chip sector — and potentially demand for industry ETFs — has helped, with AMD, NVDA, and Micron Technology, Inc. (NASDAQ:MU) all posting huge gains of late.
That’s all good news, for now. But with net profit margins still razor-thin, it raises the question of what AMD can do if this beneficial environment changes. And the answer is not much.
There aren’t a lot of new products coming through over the winter: AMD still has to support and roll out the series of new chips launched in the first half of the year. And it needs a lot of success to break through that resistance at $15.
Earnings Pose Threat to AMD Stock
Truthfully, I think AMD is going to have a hard time getting past $15 for good any time soon – and I think AMD earnings next week could be a dangerous spot for the stock. Fundamentally, expectations don’t look terribly high, with Street EPS estimates at 8 cents on 15% revenue growth.But the AMD earnings call will have a lot to cover — and a lot of areas that could drive investor caution. This is a company trying to compete with entrenched giants, and one expected to both take market share and hold the line on pricing. It seems like a lot to ask of Advanced Micro Devices, maybe too much. And with AMD stock moving back near multi-year highs, I get the sense it’s more likely AMD earnings will disappoint rising expectations, instead of beating them.
As of this writing, Vince Martin has no positions in any of the aforementioned securities.