After an incredible run in 2016 where Advanced Micro Devices, Inc. (NASDAQ:AMD) climbed about 300%, 2017 hasn’t been as easy. In fact, shares are slightly lower overall after bouncing between $10.50 and $15.50 throughout the year. But that’s good, as it sets up a fairly easy trade in AMD stock price.
Interestingly, AMD is the only one currently struggling in the chip-trio that includes Nvidia Corporation (NASDAQ:NVDA) and Intel Corporation (NASDAQ:INTC). These companies are clearly in solid position for the correct trends, although each are in different phases along the process.
While AMD and Nvidia both produce GPUs, they are of different quality, with NVDA being the superior producer. In that respect, AMD can make for a more compelling product on the price front.
Despite being in the right trends, data center, video games, cloud computing, etc., AMD stock did not react well to earnings. While NVDA and INTC both went higher, AMD is still down about 20% from its mid-October earnings results.
Is AMD’s Business Bad?
No, quite the opposite actually. While management forecast a 12% to 18% sequential decrease in revenue from the third quarter to the fourth quarter, it still expects ~26% revenue growth year-over-year (YoY).
That snaps a six-quarter streak of quarterly growth, but I don’t think its guidance is really that bad.
Beyond guidance, AMD is quickly growing revenue and its profitability is on the rise. Net income came in at a $16 million loss in the second quarter, close to breakeven. But last quarter net income was a positive $71 million.
This fueled operating margins into positive territory, as operating income came in at $124 million. In the prior quarter, operating income was also positive. Total debt of $1.43 billion last quarter was a 12.6% reduction YoY.
So what are we looking at? In my eyes, I see a company that’s generating positive operating profit and positive net income. Revenue continues to churn higher, as do margins, while debt is falling. Analysts expect sales to grow roughly 23% this year and another 12.5% in 2018.
Admittedly, higher sales growth in 2018 would be more encouraging. But the near-200% gain in earnings this year and expectations for some-170% earnings growth in 2018 shows me that cash flow and margins are going in the right direction.
Further, AMD’s 12.5% sales growth expectations for 2018 are just shy of the ~15% growth forecast for NVDA. It’s vastly ahead of the 2.7% growth estimated for INTC.
Trading AMD Stock Price
AMD stock price has not done well lately and really hasn’t done that well this year.
Granted, after last year’s big run, it did make sense for AMD stock to consolidate a bit and take a big breather. For patient investors though, this could be a big opportunity.
As you can see on the chart, AMD has had a pretty clear-cut line of support.
That level held in early November and has bounced slightly as a result. There’s clear resistance near $15 to $15.50. But even if it acts as resistance again, we would still catch a 35% rally from current levels.
In investing, it’s usually best to keep it simple and that’s no different with AMD stock price. Buy and/or stay long AMD stock over $10.50. Below, consider cutting ties with the stock.
We’re going to use a longer term target of previous resistance, near $15 to $15.50. Using these levels, we’re looking at a low-risk/high-return setup.
The Bottom Line
Remember when we said AMD is barely lagging NVDA on sales growth but is far ahead of INTC? Well, on a sales valuation front, AMD stock price is actually the cheapest of the three.
NVDA stock trades at a whopping 15.2 times sales, while Intel trades 3.4 times sales. AMD is down at just 2.4 times.
That said, both companies are more profitable than AMD, although the latter is working to change that. In a nutshell, Advanced Micro is doing well and its fundamentals are improving.
It has income statement is growing and its balance sheet obligations are shrinking. There’s a lot to like after nearly a year’s worth of consolidating with AMD stock price near strong support.
Given AMD’s improving business, consolidating stock price and stronger financials, I believe a return to $15.50 is a when-not-if scenario.