Advanced Micro Devices (NASDAQ:AMD) stock owners have another reason for holiday cheer. It has been an exceptionally good year for AMD stock, with shares up more than 120% so far, year-to-date. And now, one of the big obstacles facing the company, the U.S.-China trade war, appears to be heading toward resolution.
Last week, the Trump Administration announced the framework for a Phase 1 trade deal with China. It’s easy to dismiss this as just more bluster. But there actually appears to be a real agreement here, with a clear fact sheet laying out what both sides will bring to the table.
Look through that and you’ll see that this Phase 1 deal isn’t just about the farmers, either. It offers measures toward stricter IP policy and preventing theft of trade secrets. That is to say, the real issues that have dampened U.S.-Chinese trade within the tech sector in recent months.
There’s still a ways to go before this potential deal turns into law. However, for the first time in more than a year, it appears that a solution is near. Unfortunately, for AMD stock, it’s also time to sell. Why’s that?
The trade deal will be a plus for AMD. However, we’re running out of positives for AMD. The short sellers are in full retreat, the trade deal is largely baked in now, and realistically how much more can you expect AMD to rally based on supposed weakness at Intel (NASDAQ:INTC) or Nvidia (NASDAQ:NVDA)? The stars have aligned for Advanced Micro Devices stock in 2019, but these tailwinds will dissipate in the new year.
Short Sellers Have Waved the White Flag
A big part of the ongoing bullish thesis for Advanced Micro Devices stock has been that short sellers would have to cover their bets against the company. For years, bears have aggressively fought AMD’s rebound at every turn. As the share price has gone up, bears plowed more and more money into their anti-AMD bets.
Until now, that is. Over the past month, it appears the bears have finally seen the light. After AMD stock broke out over the $35 level, traders started aggressively covering their bets.
For more context, realize that AMD reached nearly 200 million shares shorted last year, at the peak of negativity. This figure dropped back toward 120 million for much of 2019.
In recent months, however, short interest mounted as bears tried to keep AMD stock under key resistance below the $35 level. Short interest built up from 120 million shares to 150 million shares this fall as the technical battle waged on. But once AMD stock broke to new highs, shorts quickly admitted defeat and gave up.
Short interest is now down to barely 100 million shares. That’s its lowest level in nearly three years; it also means nearly a third of short sellers covered within the past few weeks. Up until recently, short sellers coverage was a huge tenet of the bull thesis. Now, it just happened. So one of the major catalysts for AMD stock upside has been spent.
Advanced Micro Devices Stock: Way Overvalued On Fundamentals
In part due to the recent run in the stock price, AMD is selling at an absolutely jaw-dropping valuation. It is now going for more than 200x trailing earnings, and around 70x forward earnings. If this were some cutting-edge software company, maybe this sort of price would make sense. Maybe.
But for a low-margin, slow-growing commodity business, this sort of price is simply absurd. You had one analyst upgrade AMD recently on anticipation of double-digit revenue growth next year. Well yeah, if you are selling at 70x forward earnings, you better be growing revenues at a double-digit rate. That’s hardly impressive for a company at 35x forward earnings, let alone double that.
AMD simply isn’t an attractive business for long-term investors either. For the better part of two decades, the company has struggled to ever produce consistent profits or strong cash flows. You have to believe this time is different — and dramatically so at that — for AMD stock to make sense even back at $30 per share to say nothing of the current price. Remember that Intel tends to trade for between 10x and 15x earnings most years; this sort of low-margin capital intensive chip business simply doesn’t deserve to — and won’t — trade at super-premium valuations for long.
AMD Takeaway
I’ve previously argued that AMD was an interesting case in that it had a most favorable technical outlook and a bearish fundamental one. Over the past month, the technical traders have clearly carried the day. Folks have ignored AMD’s poor business outlook and instead focused on the strong momentum behind the stock. That’s great; it has been a fantastic trade.
But it’s time to take profits on Advanced Micro Devices stock now. There’s nothing left in the tank. The stock is wildly overvalued based on its fundamentals and likely profits next year. Meanwhile, the technical factors that were supporting AMD stock are already played out. The short sellers have covered. The breakout has come and gone. If you were waiting for the trade deal-powered rally, that has happened now as well. Maybe AMD moves up a little more on the so-called Santa Claus rally into year-end. But don’t overstay your welcome, AMD is going to selloff sharply early in 2020.
At the time of this writing, Ian Bezek owned INTC stock. You can reach him on Twitter at @irbezek.
