Advanced Micro Devices, Inc. (NASDAQ:AMD) reported fiscal first-quarter earnings results on Wednesday after close. Bears had previously attacked AMD stock on its valuation, but when the company began churning out gains rather than losses, the rhetoric turned to cryptocurrency fears. We’ll get to those arguments in a minute, after looking at the quarter.
Earnings per share of 11 cents came in 2 cents per share ahead of expectations. Revenue soared 40% year-over-year (YoY) to $1.65 billion and best of all? Management provided better-than-expected guidance. Analysts were looking for second-quarter revenue of $1.58 billion while management said they now expect $1.675 billion to $1.775 billion for the quarter.
To no surprise, AMD earnings were well-received in after-hours trading, sending shares higher by about 10%. We’ll have to see how it trades through the rest of the week, though.
Valuing AMD Stock
We touched on the valuation at the beginning of the article. AMD stock isn’t as cheap as something like Micron Technology, Inc. (NASDAQ:MU) for instance, but AMD being overvalued is no longer a very good argument for the bears to make in my opinion. When Advanced Micro Devices, Inc. rallied over 400% from $2 to $10 in about year, I could see the argument.
Free-cash flow was negative, AMD was losing money and it certainly wasn’t debt free. But shame on those bears if they rode AMD from $14 or $15 down to sub-$10 levels and were greedy enough to be snooping for more gains ahead of earnings.
The latest bear argument centers on cryptocurrencies, which said that as prices of assets like ethereum fell, demand for graphics chips would fall too. Even the analysts were hitting AMD over this reasoning. I wouldn’t be surprised if the hangover in Nvidia Corporation (NASDAQ:NVDA) shares were due to the same concerns. Never mind the incredible demand behind a number of secular growth themes these companies supply.
AMD’s Computing and graphic revenue climbed almost 100% YoY and a whopping 23% sequentially. Hard to be bearish there. Same with the 400 basis points of gross margin expansion YoY. Adjusted EBITDA came in at $196 million vs. $68 million in the same quarter a year ago, debt declined slightly YoY, while operating income came in at $120 million vs. just $11 million in last year’s first quarter.
Overall, AMD stock trades at less than 24 times this year’s earnings and just 18 times 2019 estimates. That’s despite analysts calling for 130% earnings growth this year and another 36% growth next year. On the revenue front, they expect growth of 18% and 7.5% this year and next.
So much for the overvaluation argument, right?
Trading Shares After AMD Earnings
What do you do when there are three great companies all operating in an excellent secular backdrop? That being AMD, NVDA and Intel Corporation (NASDAQ:INTC). One option is the basket approach, or what I refer to as owning a smaller position in all three stocks rather than one large position in just one stock.
For those that don’t like that option though, they could make an easy case for picking AMD as their horse. I have long been a fan of buying AMD down near the bottom of this long-term trading range. After this first-quarter earnings report, I’m even more bullish on the name.
On the chart above, one can see the current trading range. Resistance has been trending lower, while support is hovering in that $9.50 area. The blue line indicates where shares closed in Wednesday’s after-hours trading session.
So what now? It would be highly encouraging to see a close above $10.50. Below that mark and technically speaking a retest of the $9.75 to $9.50 level is still on the table. However, short of a market-wide correction and because of the strong earnings, I would expect AMD stock to trend higher rather than lower.
Intermediate-term bulls can look for shares to stagger higher to resistance near $13. While wind may be at the bulls’ back, keep in mind that those major moving averages could act as resistance going forward. While business is going good, the stock price hasn’t been. Still, this report should give bulls momentum.