Advanced Micro Devices (NASDAQ:AMD) stock is trading well within the confines of its chart patterns this year. It is struggling a bit here, but that is its normal seasonal action.
I am a fan of buying dips in AMD stock, and therein lies today’s discussion. It is falling into a support zone that should hold if the stock markets in general don’t collapse. Technically from here into $45 there are buyers ready to pounce on it. The overnight positive reaction to Micron (NASDAQ:MU) earnings will also boost all chip stocks.
There are still too many investors who do not believe in technical analysis, and they are committing a grave mistake. In this modern era of trading, machines do most of the trading and they do not do it based on opinion. The main drivers for their actions are math, ratios and patterns. Consequently investors — especially those who actively trade without technical skills — are putting themselves at a disadvantage.
But we all do have tools to cover the basics, at least evening the game.
AMD Stock Is a Buy-and-Hold Candidate
AMD stock has been a great long-term investment but also a fun stock to trade shorter-term. The two can go hand in hand, and investors don’t have to choose one or the other.
Fundamentally it is not cheap, but that is not a deal-breaker. The sector is booming because the world is going digital. The global quarantine put the digital migration trend in high gear and the ramp is getting more exponential. There is a panic among people and businesses alike to get online. Fear is a great motivator. People are afraid to go out, and the only solutions that we have are digitally based.
Advanced Micro Devices is one of the few companies that supply the brains to power the machines. They will have tremendous demand on there goods and services for years to come. And there’s plenty of room for it and all its competitors to thrive. Therefore dips in their stocks are opportunities to buy. Last week ended on a difficult note for AMD and Nvidia (NASDAQ:NVDA) and more pain on Monday morning but that could end today.
Between these two I prefer AMD over Nvidia. I don’t like it when investors overpay for upside hopium.
AMD Is Not Expensive, Contrary to Popular Belief
The Nvidia stock price is 20 times its yearly sales, which is more than double what it is for AMD. Traditionally investors concentrate on the price-to-earnings to ascertain value, but doing so for AMD and Nvidia would be a mistake. They are growth stocks, and profitability is not the key metric to consider.
Yes, AMD has a huge 121 tailing price-to-earnings ratio compared to Nvidia’s 71. But that doesn’t matter here, because what matters more is the top line and there NVDA has twice the fat.
Nevertheless, this year Wall Street is in love with Nvidia quite a bit. Consensus is that they are best poised to capture so much of the new wave of tech. That is a lot of expectation to live up to, and usually those create room for disappointments.
AMD stock was the best performer of the entire S&P 500 in 2018 and 2019. This year it is lagging a bit, but the game is still going on and anything can happen. In times of trouble, investors trim fat quickly, and the high price-to-sales ratio leaves Nvidia more vulnerable to sharper dips than AMD. For that reason I still prefer buying dips in AMD more than any of its competitors.
We haven’t mentioned Intel (NASDAQ:INTC) yet because it lacks pizzazz. Leadership there has been underwhelming for a while and continues to struggle.
This month, Apple (NASDAQ:AAPL) launched their own set of chips so there’s nothing obvious to chase in INTC here. Investors who want to own successful chip company stocks will choose between AMD and NVDA. Lisa Su the CEO of AMD has played a great game so far and for as long as she’s in charge they’re not likely to commit mistakes.
There Are Inherent Risks
The risk to the stock this year comes from extrinsic factors not self-inflicted wounds. We are going into an election year in the U.S., so there’s always the risk of escalating rhetoric against China. However this time around both countries are wounded, so they’re not likely to pick big fights. There might be skirmishes here in there but it won’t be a full-on trade war like it was last year.
Trading momentum stocks like this is not easy using traditional methods. I have had great success selling risk into fear. On bad market days when AMD stock falls fast, the put premiums go wild. Selling those to panicked investors has yielded profits every time and without any out-of-pocket expense.
For example, on Friday investors who sold the AMD January $37 put collected $2.50 for it. This means that even if the stock falls another 26% they would still book 100% of their profits. For perspective, the breakeven for this trade is 5% below the Covid-19 crash low.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.