Last year, Advanced Micro Devices (NASDAQ:AMD) stock was the chip champ. It managed to be up 50% while the whole market was in correction. Today we examine the opportunity that fear is offering us this week.
As if we needed a reminder that stock markets are still hostage to headlines, yesterday a very weak ISM manufacturing report triggered heavy selling on Wall Street that flipped the day from very green to very red. Fear spiked 20%. Clearly, investors are on edge so for the short-term, homework is hampered a bit by headlines. But therein lies the opportunity to bet on AMD stock on these tough days.
Not every dip is an absolute buy, but the longer AMD stock price lingers above support in spite of all these fears, the greater the upside rally will be. Timing is important because investor time frames vary a lot. There is no one-trade-fits-all here.
For the long term, if stocks are higher then AMD stock will also be higher. This is a company that has great management and it operates inside a popular sector. The world is addicted to technology and this is not a fad. The tech trend will linger for decades and increase exponentially. Demand on AMD products and services will be strong for years to come. There is enough room for it, Nvidia (NASDAQ:NVDA), and Intel (NASDAQ:INTC) to thrive. This is to say that long-term investors in AMD need not worry about these shorter term gyrations.
For the short term, the charts offer a great map for the active traders. First thing to note is that on Tuesday when markets were falling out of bed, AMD held up fairly well. This often suggests that there isn’t much froth left in the stock here. But this is not the same as saying that it is cheap.
AMD Stock Is Worth the Risks in Spite of Fears
AMD stock is not a bargain since it sells at a three digit price-to-earnings ratio. However, it’s only at 5 times sales so it’s not bloated either. This could be that they are growing their sales lines so they can keep up this over-valuation for a while longer. For comparison, INTC has a 12 P/E but 3.5 times sales and NVDA sells at 9 times sales plus an outrageous P/E.
What is important is that AMD grew their sales 60% in three years. Growth companies like these are supposed to spend a lot in order to deliver on expectations. But there is often a reason why investors give stocks like AMD more leeway than others.
Year-to-date it is leading the pack of the sector by at least 20%. Over two years, AMD stock is up 122% when INTC and NVDA are +27% and -4% respectively. This is a case where you get what you pay for.
It is unfortunate that the sector trades in unison, because they recently suffered in sympathy from the earnings selloff in Micron (NYSE:MU). This is where Wall Street extrapolates from one company’s shortcomings into all others in the same sector regardless.
Advanced Micro Devices Stock Chart Shows Support
Click to EnlargeThe AMD chart shows that price has fallen into support from the consolidation zone during April through June, so it is imperative that it holds. Otherwise, the AMD stock price is vulnerable to trigger bearish patterns that would target $25 per share. This is not a forecast but a scenario that exists today. But if we get economic reports that contradict the woes that the manufacturing ISM showed this week then this tizzy shall pass and AMD will recover and seek new highs.
The central banks are still committed to inflating the globe. The U.S. service sector and consumer are still alive and strong, so the bullish thesis still makes sense. Plus we are going into an election period so it is likely that politicians will want to keep things rosy in the U.S. until then, As a result, they will do whatever it takes to maintain U.S. GDP on track. All this is to say that the headlines have not yet changed the game. But they do offer opportunity dips.
Conversely, there is no denying that uncertainty reigns this week so I don’t take full positions at once. Furthermore, it is prudent to use tight stops so not to turn trades into long-term commitments. It is important to define the investment’s time profile and stick to it.
It also curious that most analysts who cover the stock have it as a hold. This reduces the risk of downgrades and increases upside surprises. Their median price target is 13% higher than current prices so there is plenty of room to run.