It appears that Advanced Micro Devices (NASDAQ:AMD) is potentially on the verge of a technical breakout. AMD stock has been trying to top the $35 mark since last fall — hitting that peak and then retreating on various occasions.
Last month, I described how AMD stock could prove the bears wrong and jump up to $40 in the near future. Fast forward to today, and AMD stock has barely moved at all, up or down. It continues to trade listlessly just above the $30 level. This is starting to become a problem. The stock market has traded well in recent weeks, and numerous tech stocks have jumped to new all-time highs.
The trade war fears are receding, at least for the time being. President Donald Trump has suggested that he may make a short-term arrangement with China to diminish the impact of tariffs while they continue to negotiate. Meanwhile, investors have calmed down about potential recession worries as the yield curve has normalized. Everything seems to be falling in place for semiconductor stocks such as Advanced Micro Devices to blast off. Instead, AMD stock is just treading water. This sets the stage for a potential breakdown if anything goes wrong.
AMD Needs to Seize the Moment
There’s more to AMD stock’s stall than just technical factors. The company needs to strike while the iron is hot. Arguably, AMD has a significant lead over key rivals Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) for the first time in a decade. AMD is gaining market share and rebuilding its brand’s prestige again.
Yet, while it is getting a lot done in terms of researching, developing and launching new products, the business still hasn’t reclaimed its prior glory. AMD’s annual revenues peaked at $6.6 billion back in 2011. They sunk to a measly $4 billion a few years back, but have failed to exceed their prior highs. Revenues ticked back to $6.5 billion last year but have sunk from that level again in the most recent trailing 12 months. Adjusting for inflation, AMD remains well short of its previous peak.
Let’s give credit where it is due. AMD has become slightly more profitable in the ensuing years. It has aggressively trimmed both overhead and research and development spending, thus helping to lift its margins. That said, those things — particularly research and development — are vital if AMD is going to maintain its advantageous place in the technological arms race with Intel and Nvidia.
Furthermore, AMD has lost money five out of the last ten years on an operating income basis. Looking at earnings per share, six out of the last ten years have ended in the red. Given how cyclical and competitive the industry is, it’s troubling that AMD isn’t making more hay while the sun is shining.
Share Dilution Is Killing AMD’s Long-Term Value Proposition
AMD’s spotty revenue record and inconsistent profitability are concerning. Adding to it, the company has dramatically diluted the shareholder base. Since 2009, AMD has emitted nearly half a billion new shares of its stock. This has boosted the overall share count from 678 million to 1.1 billion today.
What does this mean for shareholders in practice? When AMD does have a good year, it matters less to the EPS figure than it used to.
Consider the following. In 2009, AMD earned $307 million from its operations. This worked out to 45 cents per share in earnings. Not too shabby, especially considering how awful the economy was at that point. It’s telling that the company had lower EPS in 2018 despite a far better economy and its best line of products in years.
In any case, in 2018, AMD earned $337 million. That’s slightly more than it did in 2009. Yet, EPS clocked in at just 34 cents. The massive increase in shares greatly diminished the impact of stronger earnings.
It’d be one thing if this flood of new AMD stock had driven a far more valuable business. But it hasn’t. Net income is essentially flat, while revenues haven’t reclaimed their old peaks and are down significantly in real terms. The huge increase in outstanding AMD stock hasn’t led to a much better balance sheet either. Yes, AMD managed to pay down a lot of debt in recent years. But it did this in part by shrinking its asset base as well.
Net equity — and book value per share — haven’t moved much and remain barely in positive territory at less than $2 per share today.
AMD Stock Verdict
What does it all mean for the AMD stock price? I made the technical case for Advanced Micro Devices stock shooting up to $40 before. And that case still holds. If bulls can get a real breakout here around the $35 mark, there will be a solid short squeeze. The potential is still there, but the clock is ticking.
The longer AMD stock goes sideways — particularly as other tech shares rally — the more confident the bears will get. Let’s be frank for a minute. The bears have a solid argument on a fundamental basis. AMD has a poor track record historically, and it’s not earning enough money now to justify its share price — especially given how poorly AMD tends to execute during down cycles.
AMD stock is great for trading now, and bulls still have a shot to make something happen. But if the breakout doesn’t start soon, traders will get bored of it. And if they do, look out below. The fundamentals simply aren’t enough to keep AMD stock hanging above $30 forever.
At the time of this writing, Ian Bezek owned INTC stock. You can reach him on Twitter at @irbezek.