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It Might Be Time to Take Profits as AMD Stock Takes a Breather

Chipmaker Advanced Micro Devices (NASDAQ:AMD) has been volatile following its Q4 earnings release in late January. Yet year-to-date, AMD stock is already up about 8%.

It Might Be Time to Take Profits as AMD Stock Takes a Breather
Source: flowgraph / Shutterstock.com

In comparison, the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is up about 1%. Long term, I believe AMD is going to rise much more.

However, in the short-term, it is likely to be choppy and somewhat of a mixed bag. A couple of negative headlines in the next few weeks may drive many tech stocks down.

AMD Stock Has Strong Fundamentals

On Jan 28, Advanced Micro Devices reported its fourth-quarter earnings. It posted revenue of $2.13 billion, beating the $2.11 billion analyst estimate.

The group also beat earnings 1 cent per share, as the company reported 32 cents per share in quarterly profits. And its gross margin increased by 4 points YOY.

The company reports the results in two main segments:

  • Computing and Graphics segment (revenue came at $1.66 billion, up 69% YoY and 30% compared to the prior quarter, due to strong sales of Ryzen processors and Radeon gaming GPUs).
  • Enterprise, Embedded and Semi-Custom segment (revenue came at $465 million, up 7% YoY, driven by significantly higher EPYC processor sales, but partially offset by lower semi-custom sales. Revenue declined 11% compared to the prior quarter due to lower semi-custom sales, partially offset by strong EPYC processor sales.)

Guidance came in slightly lower than the Street forecast. Management now expects $1.8 billion in revenue in Q1. The forecast was for $1.86 billion, so some investors decided to take profits the next day.

The stock (which closed at $50.35 prior to the earnings announcement) fell to a recent low of $46.10 in the next few days. Now it is hovering around $49. The company, in general, has a history of reporting mixed quarterly results. Therefore increased volatility around earnings results has become the new norm for AMD stock.

Despite the slight fall in quarterly guidance, it is important to remember that this guidance means over 40% revenue growth from the year-ago level. In other words, the company’s fundamentals remain strong.

AMD Has Robust Long-Term Prospects

As technology has advanced, especially over the past decade, semiconductor chips have become somewhat of a commodity and a crucial part of any technological development. Today, U.S. chip companies lead the world with a combined global market share of nearly 50%. And shares of semiconductor companies usually act as a bellwether among technology stocks.

Innovation is a key driver for creating economic value and profitability. Especially in 2019, Advanced Micro Devices launched a robust range of products that Wall Street and customers liked. 

AMD processors are now 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. It is also regarded as the “brain” of a computer.

As new frontiers in technology, such as the internet of things (IoT), artificial intelligence (AI), autonomous driving, and 5G, are developed, I am bullish on the future of Advanced Micro Device.

Overall many analysts highlight that AMD is executing its strategic plans well. Since late 2014, under the leadership of CEO Lisa Su, revenue has increased and the company has improved its balance sheet. It has also reduced debt considerably.

Wall Street loves turnaround stories. Over the past several years, AMD stock has gone from $2 in early 2016 to an all-time high of $52.81 on Jan 24. Within the next few years, analysts further expect AMD to grow earnings by about 30% annually. AMD has a lot going for it and the future looks rather bright for the company.

Yet, recent positive news have now possibly been factored into the stock price. Until the next earnings announcement, the share price is likely to become a battleground between long-term investors and short-term traders.

What Could Derail AMD Stock Short-Term?

2020 started with the signing of the phase one trade deal between the U.S. and China. Broader markets, but especially semiconductor companies welcomed the development as China consumes more than 50% of all semiconductors made worldwide. At present, over 30% of AMD’s revenues come from China as the country is its largest market.

In addition, many U.S. technology companies either have manufacturing plants in China or use Chinese companies in their supply chains.

But with late January came the headlines on the coronavirus that has been increasingly affecting mainland China. It would be correct to say that we do not yet know the exact economic effect of the virus on the country as well as the semiconductor industry.

Put another way, most of the negative catalysts that could hurt any semiconductor stock involves China, either directly or indirectly. Recent research by John VerWey of the U.S. International Trade Commission concludes that “China’s economic ascendance has made it an integral producer and consumer of semiconductors.”

The chip industry is a highly cyclical one. In case of an economic slowdown either in China, the U.S. or globally, AMD and other industry players that fight for market share would be adversely affected.

Therefore, until we have clarity on the economic effects of the viral outbreak, I do not expect many tech stocks, including AMD share price, to make new highs.

In the coming weeks, if any other chip company, such as Nvidia (NASDAQ:NVDA) or Intel (NASDAQ:INTC), issues a trading update or a quarterly report that includes weak guidance, then investors could easily become bearish on semiconductor stocks, including AMD.

If you are an investor who follows technical charts, AMD stock has strong resistance around $50. Thus it’d possibly take further fundamentally strong news to give the momentum to push and keep the stock over that level.

The Bottom Line on AMD Stock

In recent months, AMD has become a momentum leader stock. Therefore, investors should expect sizeable daily swings in the stock price. Technically the share price is known to make a series of rallies and consolidations. We can expect this trend to continue in the coming weeks, too.

China-related issues can adversely affect next quarter’s numbers for many tech stocks. Therefore, there may be further volatility with a downward bias in AMD shares. If you already own Advanced Micro Devices stock, you might want to stay the course and hold onto your position.

Alternatively, given short-term risks, investors with paper profits may want to take some money off the table.

If you are an experienced investor in the options market, you may also consider using a March 20 expiry at-the-money covered call strategy. Such a strategy would offer some downside protection in case of a decline in the stock price. It would also enable investors to participate in a potential up move.

Finally, I find AMD stock to be a buy candidate, especially as its price dips toward $45. In a few years, I’d expect the shares to reach 65.

As of this writing, the author did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/02/take-profits-amd-stock-takes-breather/.

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