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Wed, September 30 at 4:00PM ET

AMD Stock Has Created an Interesting Problem with Its Massive Success

AMD stock is entering a whole new era

If you’ve been following Advanced Micro Devices (NASDAQ:AMD) this year, it’s hard not to get excited. On seemingly all fronts, AMD stock price delivers the goods.

At This Point, the Smart Move for AMD Stock Is to Wait
Source: Sundry Photography / Shutterstock.com

Technically and fundamentally, we have the green light to continue piling onto shares. Yet I believe in this extremely bullish environment, the contrarian view is worth serious consideration.

A Closer Look at AMD Stock

First, the good news. I haven’t always been a huge fan of Advanced Micro Devices stock, as many angry Reddit users will confirm. However, for someone who is not predisposed to jumping on the AMD bandwagon, I must admit the technicals look strong.

Namely, you’re seeing exactly what you want to see this year: a series of higher highs and higher lows. Moreover, other classic indicators suggest a healthy and optimist market for the AMD stock price.

The nearer-term 50-day movirage is well above the longer-term 200 DMA. And the relative strength index, or RSI, suggests warm but not overheated sentiment.

Primarily, AMD recently launched its first Navi-based graphics cards, the RX 5700 and the RX 5700 XT. Management designed these two GPUs to face off against Nvidia’s (NASDAQ:NVDA) RTX 2060 and RTX 2060 Super. Long story short, the AMD variants on average produce superior performance metrics than Nvidia’s cards.

And because Advanced Micro made the decision to match prices with Nvidia’s offerings, the consumer is incentivized to go with the former. But before you jump onboard AMD stock, here’s something to consider.

For AMD Stock, Disruption Has a Cost

Peruse any tech journal or resource, and you’ll almost certainly come across the term disruption. Currently, it’s a buzzword, and it can apply to other segments beyond tech.

Regarding AMD stock, I appreciate why the bulls are gung-ho about it. Throughout AMD’s history, the company earned a reputation as a low-cost leader. Its products weren’t always best in class, but they were best in price.

Naturally, though, good companies led by visionary leadership want to grow beyond their roots. To AMD’s credit, CEO Dr. Lisa Su has done a remarkable job turning the organization around. And they finally shed their discount-bin image with some incredible products that rival segment leaders like Intel (NASDAQ:INTC) and Nvidia.

While stakeholders of AMD stock are excited about this disruption of the old guard, they should also know that disruption comes at a cost.

When I worked for Sony (NYSE:SNE), higher-up colleagues told me stories about how the company disrupted several markets. Flooding the retail sector with quality products at relatively cheap prices, the consumers naturally shifted brand allegiances.

Once Sony secured its dominant market share, they subsequently raised prices.

I imagine that’s the same tactic that AMD has in mind. If done correctly, it very well could skyrocket Advanced Micro Devices stock. However, Sony did their disruptive work at the height of its power. It could also afford to take the financial hit.

However, I don’t have that same confidence with AMD stock. The smaller semiconductor firm just doesn’t have the firepower to go toe-to-toe with an Intel or Nvidia. Among the three, AMD routinely registers negative free cash flow.

I don’t doubt that the company can disrupt with its products. But in my opinion, management must guard against hubris.

China and AMD Stock

Although it’s hardly a scientific survey, you should check out Stocktwits.com’s feed on Advanced Micro Devices stock to gauge sentiment. Overwhelmingly, the opinions favor AMD. In fact, you have to really look for bearish opinions.

Among the arguments supporting a higher AMD stock price was a technical one. Specifically, a user argued that AMD’s trend channel showed nothing but optimistic indicators. Like I said near the top, I agree with that assessment.

But interestingly, if you look at the really long-term chart for AMD stock, you’ll likely arrive at a different conclusion. Starting from the early 2000s tech bubble, AMD is actually charting a series of lower highs and lower lows.

AMD stock price
Click to Enlarge
Source: Source: JYE Financial, unless otherwise indicated

Right now, we’re near this trend channel’s third peak, which suggests an inflection point: do shares move higher or do they collapse like history suggests?

Under this context, I’m not liking the China headwind. Although the U.S. and China have agreed to hold off further tariffs, this peace is tenuous at best. Both administrations are under pressure from their respective constituents to not show weakness.

It’s also telling that prior to the temporary truce, semiconductor firms were worried about the trade war. Now, they’re not? That doesn’t make much sense.

But like I said earlier, AMD doesn’t have the financial strength to ride out storms like Nvidia or Intel. Therefore, I wouldn’t take this bet. When you’re simultaneously dealing with questionable financials and even more questionable geopolitical headwinds, it’s no time for recklessness.

As of this writing, Josh Enomoto is long SNE.

Article printed from InvestorPlace Media, https://investorplace.com/2019/07/price-of-disruption-too-high-for-amd-stock/.

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