“Sell in May and go away” is an often-repeated saying on Wall Street. Some years this old adage doesn’t apply, but in 2019, the markets have lived to their seasonal reputation in May. Yet Advanced Micro Devices (NASDAQ:AMD) has been one of the few tech companies that have not been as adversely affected as the broader market. Instead, during the past month, it has traded within a range of $26.03-$29.67. AMD stock finished the month at $27.41.
However, I believe that there is still room for correction in AMD as a swift resolution to trade tensions is not likely to happen. Therefore, long-term investors can possibly find a lower and thus more favorable entry price into Advanced Micro Devices shares during this volatile phase.
Here is why…
AMD and the Competition
AMD is part of the semiconductor industry. This is a highly competitive sector where companies have to stay on the leading edge of technological advances. Product developments and economic cycles both in the U.S. and globally affect their revenues and thus the stock prices.
On May 7, the U.S. Department of Energy announced that Advanced Micro Devices 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.
In other words, AMD has a roadmap to compete with Intel’s dominant CPUs and Nvidia in the graphics-card space. Investors in Advanced Micro Devices stock are also hopeful that the company may grab market share from its two rivals.
Share prices of both INTC and NVDA have suffered considerably in May: INTC stock has fallen over 25% and NVDA stock is down over 30%.
Intel has especially been facing headwinds in the data center business, its main driver of growth. On April 25, the company issued a warning for the next quarter and lowered its guidance for the year. Datacenter chips have high gross margins; therefore shareholders have penalized Intel shares since this latest warning.
NVDA stock has also fallen the past few weeks, especially on the back of data center worries, sales weakness in China and excess inventory correction. Many analysts suggest that NVDA stock’s pain may not yet be over.
Similarly, on April 30, when Advanced Micro Devices released earnings, its quarterly revenue was down 23% year-over-year. Net income was also down 80% to $16 million.
Going forward, like its rivals, AMD is hoping for a pickup in demand. Retail shareholders shouldn’t use hope as an investment strategy. If AMD management were to announce yet another revenue or earnings drop soon, Wall Street may decide to hit the “sell” button on the stock.
On a final note, the trailing P/E ratio for AMD stock stands at a hefty 106. In comparison, Intel’s is 10 and Nvidia’s is 25. Therefore if there are any adverse headlines or potential earnings warnings either from AMD or any of its peers, the share price of Advanced Micro Devices could easily go down.
In other words, a high P/E ratio also contributes to the volatility in a given stock’s price as shareholders tend to regard it as a growth stock and react to earnings reports and other headlines rather fast. Thus investors may decide not to reward AMD with such a high P/E multiple if they fear the stock’s growth trajectory is somewhat not on track.
Analyst Enthusiasm Is Waning
The escalating trade wars with Beijing coupled with the most recent uncertainty over potential tariffs on Mexican products have sent markets on a downward spiral. Not only stocks, but also many major market indices, and the ETFs that track these indices have sold off.
China consumes more than 50% of all semiconductors made worldwide. Furthermore, many U.S. 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.
The widely followed PHLX Semiconductor Index (INDEXNASDAQ:SOX) is down over 15%. Many investors and traders participate in this group of stocks via the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) or the Vaneck Semiconductors ETF (NYSEARCA:SMH). For these ETFs, the month of May has been a tough ride, too. And June may not necessarily be smooth sailing either.
Sentiment around the chipmakers is down and many analysts are less than enthusiastic about the immediate future of this segment. Even before the renewed trade tensions began in early May, Wall Street was already warning about slack demand over the coming quarters as well as a serious downturn in the industry. Could these chip stocks have reached their 2019 highs in the eyes of investors?
Shares of semiconductor companies usually act as a bellwether among technology stocks. Therefore, unless the semis stabilize as a group, I do not expect Advanced Micro Devices stock to make new highs any time soon.
Short-Term Technical Charts and AMD Stock
Advanced Micro Devices is a momentum stock. Therefore, its price volatility is high. On a given day, it is usually a battleground between long-term investors and short-term traders.
Since May 6, Advanced Micro Devices stock has been especially volatile on a daily basis. It has traded within a wide range, moving between the high and mid-$20’s. AMD stock is currently trading in the middle of this range.
In other words, AMD stock price has been consolidating lately. And it is finding support form its 50-day moving average.
I believe the stock market will continue to be volatile and weak in June, too. Therefore, sizeable daily swings in AMD stock are likely to continue.
In the coming weeks, I expect the AMD stock price to break out of this range. Although the new leg could be either up or down, I expect AMD shares to decline first toward $25 and then further toward $20-$22.5.
At that point, I’d expect Advanced Micro Devices stock to start to build a base and then trade sideways, possibly until its next earnings report in late July.
However, in case of a swift end to trade tensions, AMD stock would likely rally toward $29, where it would face major resistance.
Short Interest and AMD Stock
As part of short-term sentiment analysis, investors may also monitor the extent to which stocks are shorted. In other words, they follow the ratio of short positions that are open and yet to be covered. Two investors may look at the same data and have differing views. I tend to use the number as a contrarian indicator.
For example, if more than 20% of a stock’s float (available 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, 11.1% 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 are being shorted to set the stage for a massive short-squeeze rally.
On the other hand, the numbers for Nvidia and Intel are 2.3% and 1.1% respectively. In other words, these two stocks have lost over 25% of their market caps over the past few weeks on very little short-selling. Therefore, the current level of short-selling in AMD stock may put selling pressure on the shares.
The Bottom Line on AMD Stock
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.
Although I’d not bet against AMD stock long-term, the company is likely to face headwinds in the coming months, including a global decline in PC sales as well as in the chip sector.
We may also be some time away from a trade agreement with China, which may increase the expected level of slowdown in the Chinese economy, and AMD stock cannot be completely immune to these macro trends.
Therefore those investors who plan to long Advanced Micro Devices may want to consider any fall towards the $22.5-$20 range a good opportunity to buy into the shares.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.