Shares of Advanced Micro Devices (NASDAQ:AMD) soared on August 8 as the company debuted its latest line of server chips. Long-term AMD stock investors have been delighted with the price performance of semiconductor specialist.
Year-to-date, the Santa Clara-based chip designer is up about 83% while the iShares PHLX Semiconductor ETF (NASDAQGM:SOXX) is up 29.3%. Advanced Micro Devices stock is seventh-largest holding among the the exchange-traded fund’s 31 semiconductor stock portfolio.
Long-term, I believe AMD stock price is going to rise much more. Therefore, today I’m going to discuss the short-term and long-term outlook of AMD stock, one of the darlings of Wall Street in 2019.
AMD Stock is not the Underdog Anymore
Despite the uncertainties in the broader market and the semiconductor space, AMD stock jumped 16.2% last Thursday to close the day at $33.92. That followed the August 7 announcement that the company was now bringing out its 7nm (nanometer) second-generation EPYC Rome server CPU (central processing unit).
With these smaller and more power-efficient chips, AMD is aiming to rival Intel‘s (NASDAQ:INTC) 10nm chips. AMD is hopeful that it can take market share from Intel, especially in data center business, where Intel is still the market leader.
Until 2019, Advanced Micro devices has mostly played catch-up with Nvidia (NASDAQ:NVDA) and Intel. The market cap for NVDA and INTC stocks are $96 billion and $209 billion, respectively. AMD stock’s market cap stands at $36.5 billion.
Nvidia has dominance in graphics processing units (GPUs) while Intel has been a leader in central processing units (CPUs), the computing engine of most computers and data centers. Graphics processing units accelerate central processing units, boosting the performance of video and graphics and improving computers’ overall performance.
As AMD launches its Navi graphics cards in Q3 featuring the company’s 7-nanometer chips, management is confident that it will take GPU market share in the gaming segment from Nvidia.
In short, Advanced Micro Devices has taken important steps to make the fundamental metrics of the company stronger and to catch up with its main competitors.
AMD Stock’s Q2 Earnings Were Strong
Advanced Micro Devices has a history of reporting mixed results. When AMD released earnings on July 30, Wall Street paid attention to two segments: Computing and Graphics; and, Enterprise, Embedded and Semi-Custom.
Advanced Micro Devices stock reported earnings that met expectations amid tariff constraints. The group’s net income was $35 million, or 3 cents a share, compared with $116 million, or 11 cents a share, in the year-ago period.
Computing and Graphics segment revenue was $940 million, down 13% year-over-year and up 13% quarter-over-quarter. Computing and Graphics revenue was lower year-over-year primarily due to lower graphics channel sales. The quarter-over-quarter increase was primarily due to higher GPU sales.
Enterprise, Embedded and Semi-Custom segment revenue was $591 million, down 12% YoY and up 34 percent sequentially. The year-over-year revenue decrease was primarily due to lower semi-custom product revenue. The quarterly increase was driven by higher semi-custom and EPYC processor revenue.
Overall many analysts saw the Q2 earnings report as a sign that AMD is executing its strategic plans well. Since late 2014, under the leadership of CEO Lisa Su, revenue has increased and the company has been improving its balance sheet. Its debt has also reduced considerably. Over the next five years, analysts expect AMD to grow earnings by about 30% annually.
AMD’s Q3 revenue outlook, however, fell below the Wall Street consensus because of weaker-than-expected console sales. The chip maker’s Q3 revenue outlook of $1.75 billion to $1.85 billion was lower than the forecast sales of $1.94 billion.
Expect Short-Term Volatility in 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. Wall Street is nervous that the prolonged tariff wars will continue to affect chip companies’ earnings in the rest of the year. China is the leading consumer of semiconductors (more than 50%).
And 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, investors fear that U.S. chip makers will be among the largest losers of the current trade war.
Furthermore, analysts are debating whether Advanced Micro Devices stock is becoming overvalued. For example, its forward price-to-earnings-growth (PEG) ratio is about 2x. Similarly, AMD stocks’s price-sales (P/S) ratio of about 6.1x is also quite high. To put the metric into perspective, the S&P 500 index’s average price-sales ratio is 2.2x.
Short-Term Technical Analysis of AMD Stock
As a result of the impressive run-up in AMD stock price in 2019, its short-term technical indicators have become quite “overbought.”
If you are an investor who follows technical charts, AMD stock has strong resistance around the $35, a level which it has not been able to pass four times in the past two months. In other words, if and when AMD stock can go and stay over $35, long-term investors should expect another big move up in the share price.
However, when if it cannot go and stay over $35 soon, some profit-taking is likely to occur, again. In such a case, AMD stock is likely to trade within a range of about $29-$34.
Because AMD is a momentum leader stock, investors should expect sizable daily swings in the AMD stock price. Technically AMD stock is known to make a series of rallies and consolidations. We can expect this trend to continue in August and September, too.
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 being 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. In June, in addition to the broader market rally, AMD stock got an analyst upgrade that gave a big boost to its price.
However, AMD stock is not immune to the daily wide swings in the broader markets and profit-taking may once again happen in the stock price soon.
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 have already made from AMD stock.
If you are an experienced investor in the options market, you may also consider using an Sept. 20 expiry at-the-money (ATM) covered call strategy. In that case, you may, for example, buy 100 shares of AMD at a limit price of $33.5 and sell an AMD Sept. 20 $33.5 call option, which currently trades at $2.3.
The $33.5 option offers some downside protection in case of volatility and a decline of AMD stock price. It would also enable investors to participate in a potential up move. This call option would stop trading on Sept. 20 and expire on Sept. 21.
I find AMD stock to be a buy candidate, especially as its price dips below $30. In a few years, I’d expect the shares to reach $40.
As of this writing, the author holds AMD and INTC covered calls (Aug. 16 expiry).
