AMD Stock Has a China Reprieve That May Not Last

Earlier this month, Computex 2019 — the world’s biggest computer show — closed its curtains. But not before giving Advanced Micro Devices (NASDAQ:AMD) a massive sentiment lift. We’re not even into the halfway point, yet the AMD stock price is up 11% so far in June. That’s all the more impressive considering that shares slipped on the Tuesday session.

Lisa Su Might Be the Best Reason for Confidence in AMD Stock

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Year-to-date, Advanced Micro Devices stock has delivered stakeholders an 80% return. It’s almost the exact opposite narrative of larger rivals Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA). Not only that, the massive influx of bullish buyers in AMD shares is no accident: fundamentally, the semiconductor firm which has always played second fiddle deserves its reversal of fortune.

That’s because Computex 2019 was arguably all about AMD. The company’s CEO, Dr. Lisa Su, gave a keynote speech a day prior to the show. Later, AMD delivered the goods, displaying an array of next-generation chips that could upend the semiconductor industry’s pecking order. On the surface, this bodes well for the AMD stock price, both nearer-term and longer-term.

Now, I’m not a huge techie, nor am I an expert on the technical side of the chip-making business. For that, I’ll defer to the established professionals in the realm. But the takeaway for Advanced Micro Devices stock is that the underlying organization finally has the credibility in its goal to take down Intel.

These advanced chips compete not only on performance metrics, but on price point. Even to the lay observer, AMD has closed the performance gap. Therefore, whatever incremental gains Intel offers really becomes questionable when they’re charging nearly double the price.

But before you jump on AMD stock, you should consider an important headwind:

Despite Bullishness, China Is Still a Problem for AMD Stock

When you look at how far the AMD stock price has shifted, it’s tempting to believe that the chipmaker is a unicorn. Unlike the competition, AMD hasn’t suffered obvious damage from the U.S.-China trade war.

You can’t say that about Intel nor Nvidia. In May when tensions escalated between the world’s top two economies, INTC dropped nearly 13%, while NVDA tanked 25%. Advanced Micro Devices stock? It actually gained 2% before riding the aforementioned rally.

Moreover, the options market signaled unusual optimism for AMD stock. Thus, it appears that investors are confident overall that the trade war will find a resolution. If not, indicators clearly suggest that AMD is immune to this geopolitical tension.

Of course, it’s hard to dismiss that bullishness, considering the company’s product lineup. Plus, rival Intel isn’t doing itself any favors with its chip-shortage issues. Nevertheless, I’d recommend a cautious approach, especially at these levels.

First, no tech firm will get away completely unscathed from the trade war. The core issues driving the economic battle are deeply embedded with nationalistic pursuits. Most likely, China is looking to play the long game here.

Second and more importantly for Advanced Micro Devices stock, AMD needs China, just like any other semiconductor firm. Hidden in the exciting news at Computex 2019 was that several AMD chips were clearly geared toward the gaming industry. But if the trade war closes the Chinese gaming market, that could trouble AMD in a hurry.

Recall that earlier this year, Nvidia cut guidance for its fourth-quarter revenue estimates due to weak Chinese demand for gaming chips. Look at where NVDA is now.

While AMD’s next-gen chips impress, a good portion require a healthy global gaming market. A prolonged trade war hurts that case, threatening AMD stock.

Market Is Urging Caution

Technically, you have two distinct pathways regarding Advanced Micro Devices stock. You can trust the options market, which suggests that shares will move higher. Or you can bank on the regular price chart, which may be signaling a double-top bearish reversal.

Naturally, if you have skin in the game, you’re more inclined to believe the options market’s implications. You also have the incredibly strong and compelling product lineup in your favor.

But at the same time, tech stocks are volatile. It’s rare that one name would avoid the troubles plaguing the sector.

Specifically for AMD stock, I think some traders don’t fully appreciate how badly the trade war can turn. China is an ancient society with a proud populace. While the Trump administration has justification to prosecute this trade war, it did so with arguably excessive aggression. That means it completely ignored China’s cultural norms in dealing with disagreements.

As such, China can’t afford to embarrassingly acquiesce to Trump’s brusque manners. So as much as there is reason for hope, there’s also a serious case for pessimism. And that ultimately puts a question mark on Advanced Micro Devices stock, at least for the interim.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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