After a nearly 80% year-to-date rally, Advanced Micro Devices (NASDAQ:AMD) is back near its 52-week highs of $34.30. Given that AMD stock fell below $20 late last year, many investors wonder if AMD can hit new highs convincingly or if the stock will once again fail at this level. There are compelling points to be made for both the bear and bull case.
Reasons to be Bearish on AMD Stock
There are a few reasons AMD stock price might struggle to top $35.
Many traders like to break even, and for those who bought near AMD’s highs last September, there is temptation to sell to avoid any replay last year’s fourth-quarter plunge. This selling could lead to technical resistance near $34.
In terms of valuation, AMD stock is expensive. AMD trades at a forward P/E of 33 and doesn’t pay a dividend. Meanwhile, much larger competitor Intel (NASDAQ:INTC) trades at a forward P/E of 10.8 and pays a dividend that yields around 2.6%. Compared to Intel, Advanced Micro Devices is undersized and lacks the economies of scale and financial resources that Intel has.
Many of AMD’s current gains are also arguably due to a temporary situation. Due to various delays, Intel is behind AMD in process node technology. And as a result, AMD already has already begun shipping its 7nm Ryzen CPUs, while Intel doesn’t plan to launch a 7 nm processor until 2021.
AMD’s head start with 7 nm processors allows it to steal market share from Intel — until Intel comes out with its 10 nm processors. According to many analysts, Intel will have an a 10 nm CPU for desktops next year and for laptops this summer.
Although Intel is behind AMD currently, Intel will very likely catch up and surpass AMD given its much larger R&D budget. When that happens, market sentiment around AMD might not be as great as it is today.
Reasons to be Bullish on AMD
However, there are several reasons to believe AMD will rocket to new highs.
First, stocks don’t trade for fair valuation at all times. Many people buy or sell stocks for trades based on technicals or to play catalysts in the future. The buying and selling for non-fundamental reasons could cause AMD to trade higher than its fundamental value in the near future, especially given AMD’s strong upward technical trend and the recent positive news surrounding the stock.
In terms of the past positive news, AMD has had a number of big contract wins in 2019 ranging from Samsung agreeing to use AMD Radeon graphics tech for its mobile phones to Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG)’s Google agreeing to use AMD’s custom GPUs to power its Stadia game-streaming service.
Analysts have also upgraded AMD stock, with Nomura analyst David Wong raising his target price to $37 from $33 due to AMD’s promising Ryzen desktop processing units.
There could be more good news in the future. More analysts could upgrade the stock. AMD could win more big contracts. The U.S. and China could potentially settle their differences, and the end of the trade war would the entire semiconductor sector. If the semiconductor sector goes higher, there will be buying in AMD and the stock could more easily hit a 52-week high.
The Bottom Line on AMD Stock
Owning a stock near 52-week highs is a good sign — if the market is strong. Given that the Fed is considering easing interest rates and the major indices have been hitting new all-time highs, AMD has a good probability of breaking through possible resistance and hitting new 52-week highs.
As of this writing, Jay Yao did not hold a position in any of the aforementioned securities.