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After Plummeting, AMD Stock Has Big Upside Potential

AMD stock - After Plummeting, AMD Stock Has Big Upside Potential

Source: Matthew Rutledge via Flickr

Much like most of the stock market, Advanced Micro Devices (NASDAQ:AMD) stock has fallen from grace since its September highs. AMD stock fell 50% after an incredible rally that started in July. Traders bought it with a voracious appetite as if it was destined for imminent greatness.

Luckily for me, I shorted AMD stock with puts almost at the perfect top. My thesis then was that there was too much love for AMD’s immediate future and that the expectations from the rally were unreasonable. It was a typical case of ‘too much, too fast.’

At the time I took the bearish trade because I feared that the earnings would disappoint those who chased it and they did. My short trade was not against the company prospects but rather the hopium that traders had built into it was too big.

AMD stock is now at the level from which shares broke out in July. And therein lies an opportunity to reset a bullish trade based on the same thesis that investors loved it back then. Nothing has materially changed since then except Wall Street sentiment on stocks.

What also helped AMD fall from grace is the fact that the market in general also corrected. Thanks to a slew of headlines from China tariff wars and the U.S. Fed, we saw stocks like Amazon (Nasda:AMZN) and Alphabet (NASDAQ:GOOGL) fall 25% and 20% respectively. The PowerShares QQQ Trust (NASDAQ:QQQ) fell 15% from high to low for the same period.

Fundamentally AMD is viable for years to come. We now live in a technical world and our dependency on it is growing exponentially. This is a trend that is not going to change. Suppliers for this tech — like AMD — will prosper for a long time.

But it’s not cheap. AMD still runs at a loss whereas its long-time rival Intel (NASDAQ:INTC) sells at an 11 price-to-earnings ratio. From that perspective, even Nvidia’s (NASDAQ:NVDA) 30 P/E is cheaper then AMD this point.

But there is a technical case to be made for the stock in the mid term. AMD is a momentum stock so it runs fast in both directions. And now that it has fallen back into a breakout zone, these tend to be support. Those who missed the rally the first time are inclined to jump aboard this time around.

Going Long AMD Stock

Buying shares of AMD for the long term here has more upside potential than downside risk. Of course, the risk of a market-wide correction still lingers, but that is an ever-present danger so I have to ignore it and trust in the thesis.

Much like most investments during turbulent periods of time, this one too has to be done in tranches. Meaning I don’t take a full bite all at once just in case my timing is not perfect.

Click to Enlarge

AMD stock has support at $17 per share. But even if this support zone fails, there is another pivot just 10% lower. The immediate upside target would be to fill the earnings gap to $22 per share. Although is is not a guarantee, it is an attractive reward for the bulls to chase.

Just as pivot levels act as support on the way down, they also become potential resistance on the way up. AMD stock price could stall around $19 per share but it won’t likely be the end of the bounce.

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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.

Article printed from InvestorPlace Media, https://investorplace.com/2018/10/amd-stock-big-upside-potential/.

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