If you were lucky enough to step into an (NASDAQ:AMD) position anytime between late March and mid-May, then congratulations. AMD stock is up at least 30% for you, and if you stepped in at the early April low, you’re sitting on 66% gain.
Now get out. And, if you were mulling a new entry now in fear of missing out on any more upside, keep your powder dry for a while. Advanced Micro Devices shares may look and feel red hot right now, but the rally’s carried AMD stock a little too far, too fast, and a pullback is nigh.
Don’t Misread the Message
Invariably, suggesting a popular and recently-mass-purchased stock is due for a dip draw out the ire for that company’s newest shareholders. It’s understandable too. Investors buy into equities expecting them to move higher, and are psychologically resistant that a trade might not get started on the right foot.
Just to stave off that pushback though, something needs to be made clear from the get-go: This isn’t an indictment of the company. If anything, it’s an indictment of the mob mentality a trading crowd can adopt without even realizing they’re doing it; FOMO (the fear of missing out) is a powerful motivator.
FOMO-inspired rallies, however, all too often end in some proverbial tears.
Take a step back and look at the longer-term, weekly chart of AMD stock. The 66% advance from early April to now is the biggest uninterrupted rally we’ve seen from Advanced Micro Devices shares in years. Yes, the 2016/early-2017 advance was ultimately bigger, but it didn’t unfurl in a straight line. And, it certainly didn’t materialize as rapidly as the rally since early April did.
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When you start seeing things you’ve never seen from a stock before, it’s at least wise to ask why, and put things in context.
The context here is the potential for revenue growth, which sets the stage for profit margin growth. The company’s first quarter earnings tally was better than expected, fanning the nascent bullish flames starting to flicker in April, and compelling Q2 revenue guidance poured more fuel on the fire.
The company touted a couple of milestones from its EPYC line of server chips shortly after that, and sensing the company would unveil something exciting at the Computex event in early June (it’s already happened), new bulls were willing to keep plowing in.
Those bulls were right about Computex, by the way. The computer industry conference gave AMD the perfect chance to showcase its new, though still only a prototype, 7 nanometer graphics processor that sports 32 gigabytes worth of memory.
It’s a shot at GPU rival NVIDIA Corporation (NASDAQ:NVDA), just like its new 32-core “Threadripper” CPU puts Intel Corporation (NASDAQ:INTC) on notice.
It’s taken a while, but Advanced Micro Devices has finally, proverbially ‘arrived.’ Problem is, that arrival has inspired a little too much bullishness.
Rally’s Undertow in Question
There’s some ancillary evidence to support this idea too. One layer of this evidence is that despite the constant analytical scrutiny of the company and an ever-readiness to adjust their calls and target prices as needed, analysts still say AMD stock is worth only $14.40… a price it passed a couple of weeks ago en route to its current value of $16.66.
There’s also the un-deniability that at least some of the recent rally is attributable to significant short-covering.
As of mid-April, the short interest in AMD stock reached a multi-year high of 192 million shares. Since then it’s been whittled back to 174 million, though the mid-June update has yet to be posted. Given how much more progress the rally has made since the end of May, however, odds are good this last leg of the big gain was driven by a heavy dose of panicked short-covering.
That’s fine, but it’s not the crux of the reason a stock should be soaring, as that kind of buying interest has little longevity.
Then there’s the simple fact that a growing crowd of observers are all saying AMD stock is overextended, setting the stage for a self-fulfilling prophecy.
Bottom Line for AMD Stock
Again, don’t make the likely pullback something it isn’t. It’s not (necessarily) the beginning of a long-term trend, nor is it a suggestion that the company’s growth outlook (the pros are calling for 25% revenue growth this year) isn’t to be believed. It’s simply an acknowledgement that the market has a way of throwing curve balls when nobody’s expecting one.
The good news is, AMD stock is an even better long-term buy after a healthy dip, which could plausibly pull shares all the way back to the $14.00 area.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
