The qualitative story behind Advanced Micro Devices (NASDAQ:AMD) really isn’t up for debate at this point. AMD is a vastly better company than it was just a few years ago. The debate is over the AMD stock price.
Advanced Micro Devices stock now has gained roughly 1,500 percent from 2016 lows. To some investors, even given operational improvements, that might be too much.
Indeed, short-sellers have returned to Advanced Micro Devices stock: almost 13% of shares outstanding are sold short at the moment. Analysts on the whole are on the fence: the average price target of $33.05 is just 6.8% higher than the current price of $30.95.
On this site last month, James Brumley detailed the valuation concerns surrounding AMD. Growth is impressive, admittedly. But Advanced Micro Devices stock is not cheap. In fact, it might be the most expensive large-cap semiconductor stock out there.
And so resistance has held. It topped at $34 last year before the ‘crypto hangover‘ sent AMD and Nvidia (NASDAQ:NVDA) tumbling. Save for a few trades above $35, the pattern has repeated in recent months.
The valuation concerns are real. But I argued last month that AMD’s ability to take market share, notably from Intel (NASDAQ:INTC), suggested years of growth ahead. And that growth should move the AMD stock price higher over time.
The question in the near term, however, is what can finally push the stock through that resistance. And one potential issue is that, at least for now, a catalyst still seems lacking.
Good News Isn’t Enough (Yet)
It might be tempting to argue that simple momentum can get the price to $35+ at some point. After all, shares have rallied nicely this year, gaining some 67%. Intel is scuffling, and badly trailing AMD at 7nm. The new EPYC Rome chip already has brought on Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) and Twitter (NYSE:TWTR) as customers.
That information already is in the market, however. The same analysts who, on average, see 68% EPS growth in 2020 also see Advanced Micro Devices stock gaining just ~7% over the next twelve months. Intel’s travails have been widely covered. So has the relative outperformance of Rome, plus AMD’s Ryzen CPUs.
AMD, at least in the near term, is going to need another driver. What will it be?
The Trade War Resolution and AMD Stock
Certainly, progress on the trade war front could help. Chip stocks on the whole repeatedly have been rattled by negative developments surrounding tariffs.
AMD itself has “seen some uncertainties across our supply chain driven by tariffs,” as CEO Lisa Su put it on the Q2 conference call. A resolution on that front could lower costs, decrease that uncertainty – and potentially boost the AMD stock price.
That said, there’s little sign that a trade resolution is on the way. In fact, it may well not come until after the U.S. presidential election next November. Even if a surprise deal does arrive, it’s not clear that AMD will be a significant beneficiary.
After all, chip stocks have been rattled on occasion by trade concerns but they’ve risen on the whole. The iShares PHLX Semiconductor ETF (NASDAQ:SOXX) has gained 32% this year – and is up 8.6% over the past twelve months. AMD has been even better over both periods.
That performance makes it hard to argue that trade war concerns have consistently and materially weighed down the sector. For the most part, investors have discounted trade worries in both chip stocks and, for the most part, in the U.S. equity market as a whole.
Can Q3 Earnings Do the Trick?
AMD is about eight weeks out from its third quarter earnings report, which could be a driver. The company likely will give more detail on Rome. Year-over-year comparisons are easier after a 13% decline in sales in the second quarter (thanks in part to last year’s crypto demand).
Honestly, though, eight weeks is a reasonable amount of time. AMD stock actually fell after the second quarter report last month, owing in large part to disappointing guidance for the coming quarter.
That might well color any strength in Q3, and with investors still waiting for datacenter demand to rebound, the report looks potentially dicey. Investors already are expecting a solid quarter and better data center performance. If AMD doesn’t deliver, Advanced Micro Devices stock could see a repeat of the double-digit sell-off that occurred after Q2.
‘No News’ Trades
Aside from the trade war and Q3 earnings, there simply isn’t much on the horizon. Again, the story is known. The debate comes down to valuation. It’s difficult to see what moves either side for potentially the rest of 2019.
Does that mean AMD stock is a sell? Likely not as $31 is not a prohibitive price. The drivers for long-term growth are in place. Investors still are owning a quality chipmaker at these levels, and it’s possible a catalyst will arrive, or that AMD will resume its upward climb in the coming weeks.
That said, investors can look to some trading strategies to improve returns or the entry prices. Option strategies can be high-risk, so they are advised only for investors who fully understand the trades. But covered calls (selling call options against an owned position – can boost returns.
The October 33 call, for instance, expires before the Q3 report is bid at $1.15 right now. That’s three-plus percentage points of incremental return with the only drawback selling AMD at a price over $34, which, again, where resistance has held. Conversely, put selling can lower the effective entry price: The October 30 put is bid at $1.50, which provides either ownership at $28.50 or as much as 5.3% returns in a little over six weeks.
These trades might seem a little too cute, but they represent ways to play continued sideways trading in AMD stock. With little news on the horizon, that type of trading wouldn’t be a surprise. Plus, in that scenario investors can look to either buy Advanced Micro Devices at a cheaper price or goose returns while they wait for the rally to renew.
As of this writing, Vince Martin has no positions in any securities mentioned.