Shares of Advanced Micro Devices (NASDAQ:AMD) have been on fire over the past month, with AMD stock up nearly 30%. Due to this meteoric rise in a short time, I believe shares of AMD are due for a pullback.
The two main reasons why the AMD stock price fell to below $2 in 2015 was a lack of revenue growth and the balance sheet. AMD has made substantial progress on both fronts since 2015, which has lead to a substantially higher share price.
Starting with revenues, if you look at after 2015, you will see plenty of revenue growth. Conversely, if you look at 2015 and prior there are many years with negative revenue growth.
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When looking at the balance sheet, AMD currently has more cash and cash equivalents on the balance sheet now compared to 2015. In addition, AMD has cut debt on their balance sheet in half since 2015 as well. What makes the improvement in the balance sheet impressive is the fact that AMD has simultaneously increased R&D significantly since 2015. This should create a quality avenue for future revenue growth, which will feed back to the balance sheet as increased cash on hand and decreased debt.
Technicals Overbought
As you can see in the following chart, shares have performed very well over the past two years. However, when looking at the MACD and RSI, both are at overbought levels. The last time the MACD and RSI were at these levels was during the spike in the share price in August/September 2018.
Since these technical indicators are at stretched levels it makes sense for investors to have some caution.
Dividend Potential
Something not talked about by investors is the potential for AMD to eventually pay a dividend. If you look at the semiconductor landscape, AMD is the only semiconductor company with a market cap above $10 billion not paying a dividend. There was a good reason for AMD to not pay any dividends. In the past, the company had declining revenues and a lot of debt, which is not a good combination.
Things have turned around, revenue growth has been strong, and AMD has substantially reduced its debt. In addition, AMD has posted positive net income seven quarters in a row, which shows the turnaround has been successful. A potential dividend might not occur in 2020 because of the potential for trade issues to linger on. However, I could see a dividend being instituted in 2021 if the progress made over the last couple of years continues.
Bottom Line on AMD Stock
The bottom line for Advanced Micro Devices stock is that it has had a large run over a short time and it’s due for a pullback. Continued revenue growth and profitability should continue to push AMD higher over the next year. This is assuming that the trade war does not get any worse for semiconductor companies. Putting it all together, you have a company growing revenues and substantially improving their balance sheet. If AMD can continue this trend, Advanced Micro Devices stock will continue to be a strong performer over the long-term.
Longer term, I expect that AMD will be in a strong enough financial position to start paying a dividend.
As of this writing, Brad Kenagy did not hold a position in any of the aforementioned securities.
