As bearish as I’ve been on Advanced Micro Devices, Inc. (NASDAQ:AMD), I can’t say I saw the recent decline in AMD stock coming. AMD stock dipped below $10 earlier this month, touching a 16-month low in the process.
That’s not what I predicted. I’d argued for most of the last year that I thought AMD stock would stay stuck. A trading range that mostly held between $11 and $13 seemed right — unless the company could show some significant improvement in its growth potential. Indeed, I wrote a month ago that “below $10, AMD stock gets more interesting.”
Just north of that level, Advanced Micro Devices stock does look more interesting. The drivers of the bull case, notably new product lines, still are on the way. AMD’s ability to better challenge industry giant Intel Corporation (NASDAQ:INTC) remains intact. There are long-term tailwinds behind the chip space as a whole, a key reason why the sector has seen a bull run, particularly since the election.
The question is whether “interesting” is quite compelling enough. And there are real concerns facing AMD. Cryptocurrency mining weakness and reports of serious flaws have weighed AMD stock down so far. And I’m not quite ready to dismiss those concerns.
Still, the move back to $10 does make AMD’s multiple more attractive. Support generally has held around these levels, which could set up a bounce. I’m not 100% ready to jump on board with AMD stock — but more aggressive investors might be.
Bull Case for AMD Stock
One reason to buy AMD stock now is that it has been caught in a sector-wide downdraft. Indeed, chip stocks as a whole seem to have weakened. Whether it’s trade war fears or just valuation concerns, the iShares S&P NA Tec. Semi. Idx. Fd.(ETF) (NASDAQ:SOXX), better known as the “SOX,” is off 6% over the past month. AMD stock has fallen 12%, as has Micron Technology, Inc. (NASDAQ:MU). Even high-flyer Nvidia Corporation (NASDAQ:NVDA) has pulled back about 7%.
AMD, meanwhile, aside from a quick dip toward $9, has seen support hold around the $10 level — support which has held since December 2016. First-quarter earnings, due next month, could provide an upside catalyst, particularly with expectations likely rather low at the moment. More importantly, the long-term case here still holds.
After all, the company’s key new lines should drive growth in 2018 and beyond. Both Ryzen CPUs and EPYC data center chips should allow AMD to challenge Intel. For all the hype about cryptocurrency mining and its contribution to AMD revenue, the market hasn’t priced AMD stock as if those profits would continue forever. Advanced Micro Devices stock now is down over the period when mining demand ramped up. (Indeed, one would think the obvious trade on mining weakness would be to short NVDA, which has risen 138% over the past year, not sell AMD, which is down 22%.)
Meanwhile, AMD has responded to the report of vulnerabilities that hit its stock in March, and said fixes would be mostly based on firmware updates. So two of the drivers of the recent weakness that are specific to AMD seem relatively modest, at worst. The rest of the sell-off could be attributed to the market selling chip stocks — and tech stocks more broadly. If that’s the case, there’s a clear buying opportunity in AMD stock.
Is AMD Stock a Buy?
Forced to choose, I’d take the bull case at this point. AMD stock still has a heavy short interest, at almost 19%, and that’s a trade that looks far too risky at this point.
Still, there are reasons for caution. Technically, support has held, but Advanced Micro Devices also has a concerning 10-month pattern of higher highs and lower lows. Valuation, even at 19x 2019 consensus earnings per share, isn’t necessarily cheap. The chip stock space as a whole is notoriously cyclical. AMD still is heavily reliant on the PC, and long-term weakness in that industry is one reason I’m cautious on INTC as well.
AMD itself has targeted $0.75 in EPS in 2020. A 20x multiple to those earnings would value the stock at $15. Discounted back at 10%, that values AMD stock at the moment above $12. The question is whether a 20x multiple is merited — and whether AMD can hit those targets. If cryptocurrency mining weakness has some effect — and it likely will, given ASIC competition — the target is a concern. Given PC exposure and the cyclical nature of the space, a 20x multiple might be too high. (Note that Intel is trading at under 14x.)
I do think there’s likely some upside to AMD stock going forward, and maybe a near-term bounce if the market cooperates. I’m still skeptical that upside is compelling, however. I do think selling puts could be one way to enter the stock: the January 2019 $10 put can be sold for about $1.50, providing about 18% returns with a downside of owning AMD stock at an effective price of $8.50. From a return standpoint, that trade pays off equivalently to AMD stock moving to about $12 — with lower risk.
Buying AMD straight up isn’t a bad trade, necessarily. I’m just not convinced yet it will be a good trade — or that $10 necessarily is a great price. It’s low enough to be intriguing. But given potential impacts of cryptocurrency and a still-hefty valuation, I’m not sure it’s quite enough to be compelling.
As of this writing, Vince Martin has no positions in any securities mentioned.
