Advanced Micro Devices (NYSE:AMD) is once again approaching recent highs following a red-hot rally. Shares have tacked on overly impressive 20% after bottoming in mid month. Impending earnings could possibly be a further upside catalyst, but probabilities favor the downside on an overbought and overloved AMD stock.
Advanced Micro Devices is due to report earnings after the close today. Expectations are for 18 cents a share in EPS and $1.8 billion in revenues. Those estimates have come down from the beginning of the quarter when expectations were for 23 cents in earnings. Revenue consensus was also lowered from a previous $1.94 billion.
This is the typical game — lower initial expectations then beat those lowered expectations to try and send shares higher.
The problem is that the AMD stock price has already ripped higher in front of earnings. Advanced Micro Devices is up over 5 points in the past few weeks after making a low of $28 on Oct. 10. A move higher will be difficult unless earnings absolutely knock the cover off the ball. Given that the last three quarters have been basically in line, an upside surprise may be difficult to come by.
The average price target for AMD stock is $33.50 which is actually below yesterday’s $33.69 closing price for AMD. Advanced Micro Devices has eight buy ratings, 11 hold ratings and one sell rating based on the 20 analysts covering the stock. Hedge funds decreased their holdings by 627,000 shares last quarter. Certainly not a ringing endorsement from the professionals who cover or invest in AMD stock.
The professionals may be noticing that the fundamentals are getting rather rich in AMD stock. The current price-to-earnings ratio now stands at nearly 200 and also near the highest valuations of the year. The last time Advanced Micro carried such a lofty multiple was early August, which marked a major top in the stock. A further multiple expansion post-earnings seems unlikely. Even if AMD hits the $1.06 per share in earnings for 2020, it still puts the forward P/E at a very rich 32X.
Price-to-sales, which can’t be manipulated by stock buybacks and other accounting tricks, paints an even more overvalued picture. This metric just exceeded 6 and is at by far the highest level over the past 10 years. Other similar metrics such as price-to-book and price-to-cash flow are also at decade highs.
Advanced Micro Devices stock is by no means anywhere close to cheap at current levels.
Click to Enlarge The technicals are decidedly overbought on AMD stock. The 9-day RSI is at the highest level of the year with a reading approaching 80. Prior instances when RSI was this overbought marked significant short-term tops in Advanced Micro Devices stock. AMD stock is also trading at a large premium to the 20-day moving average. This has been a precursor to a pullback towards that average in the past. There is major overhead resistance at the $34.50 area.
Stock traders should look to short AMD on any further strength. The initial downside price target would be a retracement back to the 20-day moving average at the $30 area. A meaningful upside breakout past the recent intraday high of $35.55 would serve as a viable stop out level.
Option traders should consider taking advantage of the short-term implied volatility in the front week options and go long the Nov 15 $32 puts and sell the Nov 1 $31 puts for a 55-cent net debit or better. Maximum risk on the trade is $55 per spread. Ideally AMD stock closes near $31 this Friday.
The trade structure also allows additional selling of Nov 8 expiration options to further hedge if needed.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
