The past few weeks have been quite brutal for Advanced Micro Devices (NASDAQ:AMD). On Feb. 19, AMD stock hit an all-time high of $59.27. Now it is hovering around $40. That is a drop of over 30% in about a month. By definition, like many other stocks, the shares of the chipmaker are now in bear market territory.

While the declines we are seeing can be quite unnerving both emotionally and financially, every cloud has a silver lining. A good number of high quality shares, such as AMD, are trading at rather attractive levels.

Today, I’d like to discuss the long- and short-term outlook for the company so that interested readers may do further due diligence on AMD stock.

Recent Earnings Were Mixed

On Jan. 28, the chipmaker reported fourth quarter and annual 2019 financial results. Q4 earnings beat analyst estimates slightly.

The company reports the results in two main segments:

• Computing and Graphics segment (revenue was 465 million, up almost 7% year over year), and
• Enterprise, Embedded and Semi-Custom segment (revenue was 1.66 billion, up almost 69% YoY).

Revenue of $2.13 billion was up 50% YoY, primarily driven by the Computing and Graphics segment. The number translated into a 18% revenue increase from the prior quarter. The company earned an adjusted 32 cents per share.

Management offered a light revenue forecast for the current quarter. And analysts were not impressed.

In Q1, the company is expecting revenues of $1.8 billion, plus or minus $50 million. Consensus forecast was instead $1.86 billion.

Then on March 5, management warned that the coronavirus from China would likely have a “modest” impact on Q1. But since then, we have seen more virus-related headlines hit the newswires. Health professionals warn that we may not have yet seen the peak of the epidemic in the U.S. or in many other countries.

When the company next reports earnings in late April, the Street is likely to pay close attention to how the virus may be impacting the bottom line and company outlook.

Long-Term Catalysts for AMD Stock

According to AMD President and CEO Dr. Lisa Su, “2019 marked a significant milestone in our multi-year journey as we successfully launched and ramped the strongest product portfolio in our 50-year history.”

Indeed, the company achieved a record annual revenue of $6.73 billion. And since late 2014, under the leadership of Dr. Su, revenue has constantly increased and the company has greatly improved its balance sheet. It has also reduced debt considerably.

In late 2019, it released new Ryzen PC chips featuring tiny 7-nanometer transistors and Radeon gaming graphics cards. Investors had also been pleased to see Microsoft (NASDAQ:MSFT) unveiling a Surface Laptop 3 featuring a custom AMD chip.

The past several quarters have shown that Advanced Micro Devices is now a recognized industry leader that can rival Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC). Graphics processing units (GPUs) accelerate central processing units (CPUs), boosting the performance of video and graphics and improving a computer’s overall performance. AMD has a roadmap to compete with Intel’s dominant CPUs and Nvidia in the graphics-card space.

Most investors by now know how fast and far the markets fell on March 12. The next day, Northland Securities analyst Gus Richard increased the target price on AMD stock to $52.50. We can possibly expect other similar long-term calls from analysts, especially if the stock price declines further.

But Semiconductor Stocks May Still Be Affected

Currently broader markets are having lots of “worst since” days. And it is not quite possible to estimate how the wide-spreading coronavirus will impact global economies as well as semiconductor stocks.

China is the leading consumer of semiconductors, responsible for more than 50% of the global demand. And U.S. chip companies lead the world with a combined global market share of nearly 50%.

Furthermore, many technology companies, including AMD, either have manufacturing plants or joint ventures in China. Additionally, many typically use Chinese companies in their supply chains.

We all remember how volatile semiconductor stocks were while the U.S.-China trade war rhetoric developed in 2018 and 2019. Understandably, investors are now wondering whether the COVID-19 outbreak may bring a similar uncertainty.

In the coming weeks, if any chip company issues a trading update or a quarterly report that includes a weak guidance, then investors could easily become even more bearish on semiconductor stocks, including AMD.

AMD Stock’s Short-Term Technical Charts

If you are an investor who also follows technical charts, you may be interested to know that the short-term charts urge caution.

Although investors would like AMD stock to go and stay over $50, short-term traders are likely to keep the range between $35 and $45. And if the price goes below $35, then we may easily see the low-$30’s level.

In 2019, with a gain of almost 150%, Advanced Micro Devices was one of the best-performing stocks. Therefore, some profit-taking in AMD shares was to be expected in 2020. There are many long-term investors who would have bought into the share price in the summer of 2015 when it was trading around $1.60. They would not want their stellar paper profits to disappear in front of their eyes.

If you already own Advanced Micro Devices stock, you might want to stay the course and hold onto your position. That said, if you are worried about further profit taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3%-5% below the current price point, to protect the profits you’ve already made from AMD stock.

If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon, i.e., May 15 expiry. Such a covered call position would offer you some downside protection.

Because Advanced Micro Devices is expected to report its earnings in late April, you would also have enough time to reassess market conditions and your expectations of AMD stock after this call option expires.

Investor Takeaway

Over the past year, the chip giant is up over 65%. And in the years ahead, I believe the price of AMD stock is going to rise much more. New products, high margins and improved profitability will likely propel the stock to new highs.

However, in the short-term, the stock is likely to be choppy and somewhat of a mixed bag. A couple of negative macro economic or COVID-19 outbreak headlines in the next few weeks may hurt many companies, including Advanced Micro Devices, further.

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

I would not advocate buying companies on weakness in the near-term. It simply would not be possible to know how far stocks may fall before they recover or how long the declines may last. Yet, I find AMD stock to be a buy candidate as the price declines below $40 and especially toward $30.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.