Stocks tumbled yesterday after U.S. and Chinese negotiators ended talks without a trade deal. Understandably many investors are beginning to get nervous as to where we may be headed next.
Therefore, today I’d like to discuss the short and long-term outlook of Advanced Micro Devices (NASDAQ:AMD) stock, one of the darlings of Wall Street in 2019.
Year-to-date, the chip giant is up 42%. Long term, I believe AND stock price is going to rise much more.
However, in the short-term, AND stock is likely to be choppy and somewhat of a mixed bag. A couple of negative macro economic headlines in the next few weeks may drive many stocks, including AMD stock, down.
AMD stock, which is up big on the year, is not one of the safer names in the market. Additionally, the chip sector is being hurt by rising inventories and trade war concerns. In other words, I would encourage investors to wait for several weeks before buying AMD stock. By then, the sector’s outlook may have improved and buyers could be back in control.
The Fundamentals of AMD Stock Are Strong
On Apr. 30, Advanced Micro Devices reported its first-quarter earnings. Its profit of 6 cents per share came in slightly ahead of analysts’ consensus outlook.
The company reports the results of two main segments:
- Computing and Graphics segment (its revenue tumbled 26% year-over-year to $831 million)
- Enterprise, Embedded and Semi-Custom segment (its revenue fell 17% YoY to $441 million)
In the current quarter, AMD management expects its revenue to be about $1.52 billion, a decrease of approximately 13% YOY. Overall many analysts saw the Q1 earnings report as a sign that AMD is executing well on its strategic plans.
On May 7, the U.S. Department of Energy announced that AMD and Cray (NASDAQ:CRAY) had been awarded a $600 million contract to develop the ‘Frontier’ supercomputer. Expected to become the world’s fastest computer, Frontier will perform advanced calculations in areas like nuclear and climate research.
Graphics processing units (GPUs) accelerate central processing units (CPUs), boosting the performance of video and graphics and improving computers’ overall performance. The supercomputer will use AMD’s EPYC CPUs, each of which will be connected to four of the company’s Radeon Instinct GPUs.
This important deal confirms that AMD is now a recognized industry leader that can rival Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC). AMD has a roadmap to compete with Intel’s dominant CPUs and Nvidia in the graphics-card space.
As new frontiers in technology, such as the internet of things (IoT), artificial intelligence (AI), autonomous driving, and 5G, are developed, I am bullish on the future of Advanced Micro Devices, which has been quite successful in recent years. As a result, I am also upbeat on the long-term outlook of AMD stock
Yet, recent positive news from AMD’s earnings and its clients have now been factored into AMD stock price. Until AMD’s next earnings announcement, Advanced Micro Devices stock is likely to become a battleground between long-term investors and short-term traders.
Short-Term Headwinds for AMD Stock
Wall Street has recently been debating whether the semiconductor industry, which is highly competitive and cyclical, has entered a prolonged downturn. Could these chip stocks have reached their 2019 highs in the eyes of investors?
For long-term investors, such gyrations in the sector are nothing new. Yet, between now and July when many chip companies will announce their earnings again, any potential weak guidance that may be issued could lead investors to become bearish on semiconductor stocks.
Wall Street is nervous that chip companies’ upcoming results may be mixed. For example, analysts follow AMD’s gross margin levels closely. The company expects its Q2 gross margin to be 41%, the highest in eight years. Therefore, any unexpected dip in the margin could easily push AMD stock price south.
China consumes more than 50% of all semiconductors made worldwide. On the other hand, U.S. chip companies lead the world with a combined global market share of nearly 50%. Furthermore, many technology companies either have manufacturing plants in China or use Chinese companies in their supply chains. Therefore, Wall Street fears that U.S. chip makers will be among the largest losers of the trade war.
Are Traders Shorting AMD Stock?
As part of my short-term analysis, I also monitor the extent to which stocks are shorted. I tend to use that data as a contrarian indicator.
For example, if over 20% of a stock’s shares are shorted, then even a small rise in its price could actually become a powerful short squeeze and propel the stock much higher. At this point, 11.2% of AMD’s shares are shorted. So while there are plenty of traders who have shorted AMD stock, not enough shares of Advanced Micro Devices stock are being shorted to set the sage for a massive short-squeeze rally.
What Are the Short-Term Technical Charts Saying About AMD Stock?
As a result of the impressive run-up in AMD stock price in 2019, its short-term technical indicators had become somewhat “overbought,” until last week.
Since May 6, however, Advanced Micro Devices stock, like many other companies in the broader market, has been negatively impacted by the ramping rhetoric of the U.S.-China trade war.
AMD stock staged a strong comeback on May 10, only to drop again yesterday. I believe the stock market will continue to be volatile and weak for the rest of May. Because AMD stock has been a big momentum leader in recent years, sizable daily swings of AMD stock price are likely to occur.
In the coming weeks, I expect AMD stock price to decline further toward $25-$26 or even $22-$23. At that point, I’d expect Advanced Micro Devices stock to start to stabilize and then trade sideways until its next earnings report in late July.
So Should Investors Buy AMD Stock in May?
In the coming weeks, I would buy AMD stock for $25 or less.
If you already own Advanced Micro Devices stock, you might want to stay the course and hold onto your position. That said, if you are worried about short-term profit taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3%-5% below the current price point, to protect the profits you’ve already made from AMD stock.
If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon. In that case, you may, for example, buy 100 shares of AMD at a limit price of $26.25 and, at the same time, sell an AMD Jul 19 $27 call option, which currently trades at $1.97.
The $27 option offers some downside protection in case of volatility and a decline of AMD stock price. This call option would stop trading on July 19 and expire on July 20. Because Advanced Micro Devices is expected to report its earnings on July 23, you would have enough time to reassess market conditions and your expectations of AMD stock after this call option expires.
I would not advocate buying AMD stock on weakness in the near-term. Yet, I find AMD stock to be a buy candidate as its price declines toward $25. By the end of 2020, I’d expect the shares to reach $31-$32. Despite the recent decline of AMD stock price, Advanced Micro Devices is still one of the year’s biggest winners so far.
As of this writing, the author did not hold a position in any of the aforementioned securities.