Advanced Micro Devices (NASDAQ:AMD) was the best-performing stock in the S&P 500 in 2019. AMD stock rose nearly 150% last year and has added on another 13% in just the first few weeks of 2020. It has become the poster child of the momentum driven melt up in stocks. Like all good things, however, this too shall come to an end. Look for AMD stock to be a big underperformer over the coming weeks.
One would think that AMD had crushed earnings over the course of last year, given the rip roaring rally. Truth is that the company missed consensus by a penny over the last three quarters. Yet AMD stock continues to climb. The combination of lower earnings and higher stock necessarily means valuations are getting stretched.
Cowen analyst Matthew Ramsay reaffirmed his “outperform” rating on AMD stock Monday with a $60 price target from a previous $47. Mr. Ramsay said he was confident on fundamentals but nervous on valuation. Deutsche Bank analyst Ross Seymore has a less bullish view. He raised his price target to $40 per share compared to the prior $29 target. Mr. Seymore sees further upside potential to share price as challenging.
AMD Stock Valuation
Click to EnlargeCertainly there is reason to be nervous on valuation, to say the least. AMD stock has gotten incredibly expensive from a P/E ratio viewpoint. Currently this multiple is over 270 and easily at the highest levels over the past year.
Earnings are due Jan. 28 with expectations for 32 cents in EPS on $2.1 billion in revenue. AMD better beat by a wide margin to support the stock at these lofty multiples.
Click to EnlargePrice to sales is usually a cleaner look from a valuation perspective. It isn’t affected by such things as stock buybacks and accounting gimmickry that can be used by a company to lower P/E ratios. AMD stock is now over 9 on a price/sales basis. This is by far the richest multiple over the past decade.
Advances Micro Devices Stock Chart
The technical picture for AMD stock is looking tired and toppy. 9-day RSI is back above 75 which has been a signal of a top in the past. MACD continues to languish and failed to confirm the latest move higher. Bollinger Band Percent B is nearing 1oo again, another sign that a pullback may be overdue. Momentum has clearly lessened. AMD is trading at a big premium to the 20-day moving average. This usually precedes a pullback to that average.
Most importantly, AMD stock has failed to close near the highs the past two days. Shares opened and closed at nearly the same price. This double doji pattern is many times a sign that the previous trend may be nearing an end. In this case, the buyers have become exhausted and the sellers are beginning to take control. It is especially powerful given the magnitude of the latest rally in AMD stock.
At some point valuations and technicals do actually matter, even in this cheap money fueled melt up environment. Stock traders should look to short AMD on any further strength. A pullback to the 20-day moving average would be the initial downside price target.
Option traders may want to use the elevated IV to sell out of the money bear call spreads. The February $55/$60 call spread can be sold for a $1 net credit. Maximum gain is $100 per spread with maximum risk of $400. Return on risk is 25%. The short $55 strike provides a 7% upside cushion to the $51.43 closing price of AMD stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in receiving finding out more about unusual option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at email@example.com.