Advanced Micro Devices (NASDAQ:AMD) has been on fire since its last earnings report in late April. While AMD stock wasn’t trading at its absolute lows when it reported, it was pretty close. Anyway, the quarter helped propel shares from roughly $10 to more than $16 currently.
Can investors expect the same reaction when the company reports on July 25?
I love AMD stock and was pounding the table when shares were below $10 for a variety of reasons — we’ll get into that in a second. But below that mark, the risk/reward ratio was so attractive that it made no sense to bet against it. Up near $16.50, though, it’s unreasonable to expect another 65% rally over the ensuing three months.
Sizing Up AMD Stock Into Earnings
So, what made me suggest buying AMD stock with both hands when shares were below $10? Obviously, hindsight is 20/20 and after the huge rally — which admittedly and importantly, we didn’t catch all of — it seems obvious as to why we bought. But, at the time, the rhetoric couldn’t have been much worse.
Nvidia (NASDAQ:NVDA) was eating AMD’s lunch, while Intel (NASDAQ:INTC) closed the gap on too many levels for AMD to compete. Throw in AMD’s less attractive financial situation and lower margins and there was no point in buying the name.
At least, that’s what the bears made one think.
In reality, AMD continues to improve mightily. The company’s debt continues to fall, while revenue and profit continue to rise. Further, gross margins have improved over the last several years and, while NVDA and INTC have better operating and net margins, AMD is finally in positive territory too. AMD has also become cash-flow positive — another bullish development.
Is AMD the strongest company, financially speaking? No. But in my opinion, too many investors are looking at the trailing results for AMD and not what it is presently doing or should do in the future.
In that regard, last quarter, management said it expects to generate revenue of $1.675 billion to $1.775 billion this quarter. That easily beat consensus expectations of $1.58 billion.
Still, going into the report, analyst estimates are “only” at $1.72 billion. So, if AMD can come in at the high end of its range or even beat its own range, then shares could have more upside. As for earnings, analysts expect 13 cents per share, up from just 2 cents per share in the same quarter a year ago.
For what it’s worth, NVDA management also suggested that this quarter should be strong.
Trading AMD Stock
Click to Enlarge
So, how to do we trade AMD stock ahead of earnings?
I don’t recommend options very often, but a few weeks ago I suggested selling put options on AMD stock. The thought was if shares rallied, we’d see the premium fall to zero and we’d collect our entire profit. If the stock fell, though, we’d have a cost basis near $14.50, right near a vital level of support.
That level can be seen on the chart above. Simply put, AMD stock ran too far, too fast from sub-$10 to more than $17 in just a few months time. The rally was practically straight up.
After digesting the move, it’s clear that the $14.50 to $15 area is pretty decent support. That range also contains the 50-day moving average. Should that level give way, the $12.50 to $13 range should also be strong support. That contains the backside of AMD’s prior downtrend resistance line, as well as the 100-day and 200-day moving averages.
Even though shares are off the highs, we could get a Netflix (NASDAQ:NFLX) type of setup where AMD stock pulls back on earnings. Even a decline down to $14.50 would still mean the stock is up 45% from its April earnings report.
Short-term investors could play for a possible rally into earnings. If the stock does do that, I definitely want to wait before entering AMD until after its earnings report.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long NVDA.
