What a good year it has been for Advanced Micro Devices (NASDAQ:AMD) shareholders as they have been laughing all the way to the bank in 2019! Year-to-date AMD stock is up over 110%. The S&P 500 index, on the other hand, is up 25%.
Investors’ reaction to AMD’s recent Q3 earnings confirms that the long-term bullish trend of Advanced Micro Devices stock is likely to continue. Nonetheless, in the short term, there may be some profit-taking in the stock. As a result, long-term investors may get better entry points in AMD stock down the road.
AMD processors are the computing power for servers, computers, and graphics cards. Processors are built based on architectures that enable them to perform predefined actions. For example, the processor is responsible for executing all the functions of a computer. Therefore for many people, it is usually the first determinant factor when buying a computer.
In past quarters, many of AMD earnings releases have constantly lacked the “wow” factor and made the stock price vulnerable to rapid declines. However, when Advanced Micro Devices released earnings on Oct. 29, Wall Street was pleased overall.
A Closer Look at AMD Stock
Revenue hit $1.80 billion, and its operating income was $186 million. With a net income of $120 million, diluted earnings per share came in at 11 cents.
In Q3, AMD ‘s revenue grew 9% YoY and 18% quarter-over-quarter. Its gross margin expanded to 43%, up three percentage points YoY, a number that pleased analysts.
Therefore, many investors are hopeful that the semiconductor sector’s cycle might have bottomed and that Advanced Micro Devices stock’s earnings may have become more consistent starting with Q3.
Investors primarily focused on two of AMD’s segments: 1) computing and graphics and 2) enterprise, embedded and semi-custom.
The computing and graphics segment’s revenue was $1.28 billion, up 36% YoY. Its higher revenue was primarily driven by increased sales of its Ryzen processors, which are based on a 7-nanometer manufacturing process.
The revenue of AMD’s enterprise, embedded and semi-custom segment came in at $525 million, down 27% YoY and down 11% versus Q2.
Overall many analysts saw the earnings report as a sign that AMD is executing its strategy well.
AMD Introduced New Products in 2019
AMD’s success in 2019 can be attributed in part to its updated product mix. The recently introduced graphics processing units (GPUs) and central processing units (CPUs) enable the group to compete with Intel (NASDAQ:INTC) and Nvidia Corporation (NASDAQ:NVDA) heads on.
GPUs accelerate CPUs, boosting the performance of video and graphics and improving computers’ overall performance.
Intel dominates the central processing unit (CPU) space and primarily offers 14-nanometer desktop chips. Yet analysts think that AMD’s Ryzen central processing unit CPUs surpass Intel’s offerings in power efficiency and at competitive pricing structure.
Nvidia Corporation’s GPUs have earned a superior reputation compared to competing products, especially within the gaming industry. For years, NVDA has been a leader in the competitive graphics card market. However, in recent months the battle for market share between Nvidia and AMD in that segment has intensified.
NVDA’s chips had been dominant in PCs. Yet, a higher percentage of video games are being played on consoles now, and NVDA’s GPUs aren’t usually incorporated into consoles. Sony (NYSE:SNE) is, for example, using AMD’s products in its consoles.
In the second half of 2019, AMD started selling its Navi graphics cards that utilize its 7-nanometer chips. They are touted as highly power-efficient.
CNBC’s Jim Cramer has recently highlighted how strong the product offerings by both AMD and NVDA are.
In other words, intensified battle for market share between AMD, INTC and NVDA is expected to continue well into 2020.
Where AMD Price is Now
For semiconductor companies, such as Advanced Micro Devices, new designs and product offerings have to anticipate the evolving needs of customers. In the past, both AMD and its peers have been guilty of missing a product cycle. And the result has been reflected in declines in stock price.
Before its Q3 report, AMD stock had strong resistance around $35. However, after the robust earnings release, Wall Street has rewarded the company in the best way it knows, i.e. by buying Advanced Micro Devices shares.
And on Nov. 19, AMD stock hit a 52-week high of $41.79. Currently, the share price is hovering around $39.
Because of the recent impressive jump in the stock price, its short-term technical indicators have become somewhat over-extended. Investors who pay attention to short-term oscillators should note that Advanced Micro Devices stock has become “overbought.”
As AMD is a momentum stock, investors should expect sizable daily swings in the stock price. AMD usually rallies and then trades in a range for awhile. This trend is likely to continue in December.
Meanwhile, analysts are debating whether Advanced Micro Devices stock is becoming overvalued. For example, its trailing price-earnings-growth ratio is about 3.9, versus the industry average of around 2.5. Similarly, AMD stocks’s price–sales ratio of about 7.1x is also quite high. By contrast, the S&P 500’s average P/S ratio is 2.2x.
So in the final weeks of the year, investors who have benefited from the rallies of AMD stock may decide to take money off the table.
However, in the long run, the Advanced Micro Devices share price is far from plateauing.
The Bottom Line on AMD Stock
I regard AMD as one of the best semiconductor stocks to own and I expect the stock to continue to be a growth stock in the near future.
So far in 2019, Advanced Micro Devices has made impressive progress in the CPU and GPU spaces. Its data-center GPU business is especially likely to gain further momentum in the coming quarters, and its new 7nm products are likely to generate strong sales.
As long as AMD keeps innovating on products, it is likely to continue taking market share from both Intel and Nvidia.
Yet, like most other semiconductor stocks, AMD stock is highly volatile, and its share price is easily affected by the developments of the industry and of the overall tech sector.
And in the coming weeks, if any chip company, such as Nvidia or Intel, issues a negative update or a quarterly report that includes weak guidance, then investors could easily become bearish on semiconductor stocks.
If you already own Advanced Micro Devices stock, you might want to stay the course and hold onto your position.
If you are an experienced investor in the options market, you may also consider using a January 2020 expiry at-the-money covered call strategy. In that case, you may, for example, buy 100 shares of AMD at a limit price of around $39 and sell an AMD Jan. 17 $39 call option, which, as of this writing, trades at $2.45.
The $39 option offers some downside protection in case of volatility and a decline of the AMD stock price. It would also enable investors to participate in a potential rally.
In case of a near-term decline in the share price, potential investors may consider investing in Advanced Micro Devices stock. I expect AMD stock price to reach $45 in the early part of the new decade.
As of this writing, the author did not hold a position in any of the aforementioned securities.