Management Delivers a Strong Long-Term Investment Case for AMD Stock

Short-term profit taking doesn't reflect Advanced Micro Devices technological leadership

For nearly five years, chipmaker Advanced Micro Devices (NASDAQ:AMD) has been a darling of long-term investors. In early 2016, the shares were hovering around $2. Now it is around $55. Put another way, if you had invested $1,000 in AMD stock in 2016, now the amount would be close to $28,000.

Management Delivers a Strong Long-Term Investment Case for AMD Stock
Source: Fabio Alcini / Shutterstock.com

Similarly, year-to-date, it is up over 20%. In comparison, the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is down 2.56%. In other words, AMD stock has been one of the shares that have not been adversely affected by the novel coronavirus-related downturn of the past few months.

Today, I’d like to take a detailed look at the prospects for the company. In the coming weeks, although there is likely to be increased volatility with a downward bias in AMD stock, long-term investors may consider buying the dip. Here’s why.

How Q1 Results Came

California-based Advanced Micro Devices develops computer processors for business and consumer markets. The end markets for its products are laptops, data centers, and gaming.

In late April, Advanced Micro Devices announced first quarter earnings. Profits were in line with estimates and revenue beat projections, coming in at $1.79 billion, compared to $1.27 billion a year ago.

The company reported earnings in two main segments:

  • Computing and Graphics segment (revenue of $1.44 billion was up 73% 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 $348 million, down 21% YoY, driven by significantly higher EPYC processor sales, but partially offset by lower semi-custom sales.)

The Street was especially pleased with the growth in its computing and graphics segment revenues. The pandemic has meant changes in how we live and work as millions domestically and billions across the world stay home longer. And the chipmaker has been benefiting from work-from-home and play-at-home trends.

Finally, in the quarter, its gross margin was 46%, compared to 41% in Q1 2019.

However, guidance came in slightly lower than the the company’s earlier guidance in the year. Management now expects revenue to grow 20%-30% from 2019. Previously it had projected a 28%-30% growth.

Long-Term Tailwinds

Bulls of Advanced Micro Devices stock point out that the company has great long-term growth prospects. Over the past several years, the group has been offering innovative and competitive products. And that fact has been well reflected by the increase in AMD stock price since 2016.

During the quarterly analyst call, CEO Dr. Lisa Su said that despite the current uncertainty created by the COVID-19 pandemic, “… in terms of cloud and large enterprise, there continues to be good activity.” Its recent cloud-business customers include Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), IBM (NYSE:IBM), and Microsoft (NASDAQ:MSFT). These top cloud users will likely help propel AMD stock higher in the coming quarters.

Furthermore, the company expects further momentum across consumer and commercial notebooks that use Ryzen mobile processors. The Street also believes more laptops and desktops will use AMD’s products in the coming quarters. As you research the prospects of the company further, you may come across more companies using these mobile chips.

InvestorPlace readers may also be interested to learn about the publicly available institutional ownership data on AMD stock. At present, about 70.5% of all AMD shares are held by institutions. 482 institutions have recently bought almost 84 million shares. On the other hand, 414 institutions have sold about 68 million shares.

That is a net buying of almost 16 million shares. And institutions put faith in AMD stock amid a plethora question marks about our economy and health issues due to the COVID-19 outbreak. The Street has also been debating whether there could be supply and demand issues for the semiconductor designer that could ultimately affect its revenue and earnings.

AMD Stock Is Ripe for Profit-Taking

Long term — i.e., within this decade — I believe AMD stock is going to rise much more. So it is likely to continue to be be a great long-term investment for many investors. However, as a momentum stock, the shares also make wide short-term swings.

It is also important to remember that chip stocks are cyclical. They react to news on the broader economy as well as data center worries, sales weakness in China and excess inventory correction. Therefore, in the coming weeks, if Advanced Micro Devices or its peers were to release trading updates that potentially included weak sales data or warnings, AMD stock could easily take a hit.

On Feb. 19, AMD stock made an all-time high at $59.27. Then by mid-March, it saw a recent low of just below $37. As I write, it is hovering just above $55. Put another way, the stock initially fell with the broader market in late February and March. Yet since then, the stock has rebounded strongly.

Charts Urge Caution

Are you an investor who also pays attention to technical charts? Then you may be interested to know that the charts would urge caution. Short term, AMD stock is overbought. A pull back toward $50 level looks increasingly likely.

Do you hold paper profits due to the the recent increase in the price of AMD shares? Then, you may want to ring the cash register and realize some of those gains. While long-term investors would like to see the price go and stay over $60, short-term traders will likely keep it between $47.50-$52.50 in the short run.

Alternatively, 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. An ATM covered call position with July 17 expiry would offer you some downside protection. It would also enable you to participate in a potential up move.

Bottom Line on AMD Stock

Are you looking for a long-term tech company that is likely to deliver robust, stable results in this new decade. Then you should do further due diligence on AMD stock.

Management’s strength in delivering results, product innovation, and the recent institutional buying all add up to show that Advanced Micro Devices stock belongs in a buy-and-hold portfolio.

However, between now and the next earnings report in late July, I expect increased volatility and profit-taking, toward the $50 level.

If you are a long-term investor with a two-to-three year time horizon, then you may consider buying the dips. Price correction in AMD stock could offer an opportunity to buy into the shares of this well-managed company. CNBC host Jim Cramer, who was quite pleased with the recent Q1 results, recently said that the shares “are worth buying into weakness.” I couldn’t agree more.

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.


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