AMD (NASDAQ:AMD) surged upward in Tuesday trading. The chipmaker will benefit from a partnership with Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) as it will power Google’s streaming game service. This news sent AMD stock higher by more than 12% in Tuesday’s trading session. Still, AMD had already revealed this information, so the surge in the stock has left traders confused.
The massive levels of forecasted growth leave little doubt that Advanced Micro Devices remains a solid long-term play. However, such a move on known news and its propensity to move on momentum undermines the short-term case for AMD.
The Unexplained Rally in AMD Stock
AMD stock rallied on reports that Google would use AMD processors to power its Stadia video game streaming service. Such spikes occur periodically on news of a major new customer or business line. However, such moves higher rarely occur on old news.
Advanced Micro Devices CEO Lisa Su revealed at the CES trade show that Google would use AMD processors. However, she announced that news in January. This has left traders scratching their heads about the delayed reaction.
One possible explanation could involve traders finally waking up to the concept of streamed games. The gaming industry brought in $43.4 billion in revenue from the U.S. in 2018, an 18% increase from 2017 levels, so streamed games serve as yet another growth engine.
Moreover, several Google peers intend to follow with their own streamed games. Sony (NYSE:SNE) allows streamed games through its PlayStation 4, and Amazon (NASDAQ:AMZN) also plans to enter this market.
Furthermore, Microsoft (NASDAQ:MSFT) is developing Project X Cloud, which will allow streamed games through the Xbox. However, Microsoft has relied on Nvidia (NASDAQ:NVDA) graphics chips to power PC-based games, so that does not offer any clear benefit to AMD.
Momentum and AMD
Another possibility lies with AMD’s propensity for large moves. In April of last year, I recommended AMD stock as the end of the crypto craze pushed AMD toward the $9 per share level.
The equity would go on to rally above $34 per share by September before falling near the $16 per share level in December. Since that time, Advanced Micro Devices stock has surged by more than 62%, and Tuesday’s move higher added to the momentum.
How much further the equity will rally remains unclear, but the possibility of a momentum shift undermines the short-term case for AMD. Furthermore, near-term fundamentals appear elevated.
Thanks to the spike on Tuesday, the current price-to-earnings (PE) ratio that has moved above 81. Such a multiple does not stop a stock from moving higher by itself. Still, it does make AMD more vulnerable to bad news.
However, the much rosier long-term outlook on AMD makes the equity a buy on any significant pullback. Wall Street predicts 39.1% profit growth for this year and 53.1% in 2020. Analysts expect to see increases in net income which average 31.59% per year over the next five years. With such growth rates, the forward PE of around 41 should not deter investors.
The Bottom Line on AMD stock
Tuesday’s surge higher on old news and the equity’s tendency for large moves make AMD too unpredictable at these levels. AMD spiked in Tuesday trading after Google reminded traders that its streaming gaming platform would utilize AMD processors.
Still, stocks rarely spike because a company reminds traders of news that another company announced two months ago. Perhaps Wall Street better understands the potential for streaming games. The equity’s propensity to move on momentum could have also pushed AMD higher.
Due to that momentum, the stock has moved higher by more than 60% in less than three months. This makes the near-term direction of AMD stock hard to predict, and I would caution against buying right now. However, considering the long-term prospects for AMD, I would look to buy on any pullback.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
