Advanced Micro Devices Inc (NASDAQ:AMD) has been one of the best performing semiconductor stocks over the past year; it is up over 60% year-to-date. 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 AMD stock.
However, there are several short-term headwinds that may need to be discounted against the AMD stock price. These bearish themes include uncertainty as to when the U.S.-China trade wars will be resolved, the cyclical nature of the chip industry, slowing demand in gaming consoles, and AMD’s rich valuation metrics. Therefore, in the coming weeks, the positive momentum in Advanced Micro Devices stock may stall. Let us see why.
AMD Stock Cannot Be Immune to China-Related Risks
The U.S.-China trade war is now in its second year. Wall Street is nervous that the prolonged tariff wars will continue to affect chip companies’ earnings for the rest of the year. China is the leading consumer of semiconductors with more than 50% of the global demand coming from the country.
And U.S. chip companies, including Advanced Micro Devices, lead the world with a combined global market share of nearly 50%. Furthermore, many technology companies, including AMD, either have manufacturing plants or joint ventures in China. Additionally, they typically use Chinese companies in their supply chains. Therefore, investors fear that American chip makers will be among the largest losers of the current trade war.
During the recent second-quarter earnings release of July 30, AMD management highlighted China as a risk. At present, over 30% of revenues come from China.
Moreover, the chip industry is a highly cyclical one. In case of an economic slowdown either in the U.S. or globally, AMD stock as well as other industry players would be adversely affected.
Wall Street has recently been debating whether chip stocks have reached their 2019 highs in the eyes of investors. For long-term investors, such gyrations in the sector are nothing new. However, it may mean more volatility for Advanced Micro Devices stock in the near-term.
Advanced Micro Devices Stock Has Several Company Specific Risks
AMD has a reputation for reporting mixed earnings. That was once again the case when the semiconductor firm reported on July 30. AMD stock beat expected estimates. However, revenue was down 13% year-over-year. The company said revenue was lower in both its computing and graphics and enterprise, embedded and semi-custom segments. As a result, management lowered Q3 guidance. And the markets penalized Advanced Micro Devices stock the next day.
Constantly lacking the “wow” factor in most of their earnings makes the AMD stock price vulnerable to rapid declines. Naturally, this has unnerved many long-term investors.
Furthermore, analysts are debating whether Advanced Micro Devices stock is becoming overvalued. For example, its forward price-to-earnings-growth (PEG) ratio is about 1.6-times forward earnings. Similarly, AMD’s price-sales (P/S) ratio of about 6 times is also quite high. To put the metric into perspective, the S&P 500 index’s average P/S ratio is 2.2x.
It would be also important to mention the various rumors that CEO Lisa Su may leave AMD. Since late 2014, under her leadership, 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. Therefore, if Dr. Su were to leave the position, AMD shareholders may decide to stay on the sidelines until there is more clarity regarding her successor.
So far in 2019, Advanced Micro Devices has offered new products. These have increased investor expectations for coming quarters. Thus, it would not be wrong to assume that most of the good news has already been factored into the AMD stock price. However, if the group cannot deliver robust earnings in the coming quarters, then investors would not hesitate to punish shares.
Short-Term Technical Analysis of AMD Stock
Due to the impressive run-up in Advanced Micro Devices stock in 2019, several technical indicators have become quite overbought. Therefore, market participants should exercise caution.
If you are an investor who follows technical charts, AMD stock has strong resistance around $35. This is a level which it has not been able to pass four times in the past two months. In other words, if or when AMD stock can go and stay over $35, long-term investors should expect another big move up in the share price.
However, if it cannot go and stay over $35 soon, some profit-taking will likely occur again. In such a case, AMD stock is likely to trade within a range of about $28 to $34.
The short-term technical charts of Advanced Micro Devices stock, especially following the recent earnings report, indicate a higher risk that shares can fall below $30.
Because Advanced Micro Devices stock is a momentum play, investors should expect sizeable daily swings. Technically, AMD is known to make a series of rallies and consolidations. We can expect this trend to continue in August and September, too.
The Bottom Line
I am upbeat on the long-term outlook of AMD stock. In June, in addition to the broader market rally, shares received an analyst upgrade that boosted their price.
However, Advanced Micro Devices stock is not immune to the daily wide swings in the broader markets. Moreover, profit taking may happen soon. I believe that headwinds in gaming consoles and China can adversely affect next quarter’s numbers.
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% to 5% below the current price point. This strategy protects the profits you have already made from AMD stock.
If you are an experienced investor in the options market, you may also consider using a 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 $32 and sell an AMD Sept. 20 $32 call option, which currently trades at $2.10.
The $32 option offers some downside protection in case of volatility and a decline of the 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).
