Advanced Micro Devices (NASDAQ:AMD) finally popped higher and blew through resistance. AMD stock finally gave bulls what they were looking for: A mega-sized breakout.
Shares are up 52% in 12 trading sessions. I’m not saying that AMD won’t continue its run. After all, the technicals and fundamentals are aligned and shares consolidated for multiple months.
That said, I do think investors will have a better opportunity to buy AMD than paying up at $87. Admittedly, that means it could run to $100 before pulling back first. But sometime in the next six months, investors should get another shot at this one.
So what caused this massive move anyway?
Fundamental Stars Start to Align
Multiple catalysts ignited this stock higher. Interestingly enough, its own earnings report was only gas on the fire. The initial spark was a technical breakout over resistance on July 22.
However, two days later the fundamentals aligned with the breakout. This time, it was Intel’s (NASDAQ:INTC) earnings report. Long story short, the company is conceding market share to AMD, as its 7nm chips face a huge delay. Like, the not being released until 2022 kind of delay.
This allowed AMD to kick the door in and the stock responded in kind, rallying 16.5% in a single session. A few days later, it’s own top- and bottom-line earnings beat propelled shares higher again, up 12.5%.
All of this is to say that investors who look for solid technical setups and fundamental opportunities can see big payouts when timed correctly. Admittedly, the stock has run pretty far in the last few sessions, but the fundamentals support the cause.
Many growth stocks have made huge runs despite the novel coronavirus wreaking havoc on the economy. Dismayed investors are arguing that these stocks are overvalued and can’t possibly justify these valuations. While I agree that the overall market has likely run too far, too fast, and will face a healthy correction at some point, we have to recognize the scarcity value of growth stocks.
That is, with fewer companies churning out growth in this tough environment, those that are now command a higher valuation because growth investors have fewer stocks to pile into.
Consensus estimates call for 32.5% revenue growth this year and 22.5% growth next year. Earnings are forecast to grow 70% and 50% in 2020 and 2021, respectively. The balance sheet is improving. So are cash flows.
Put simply, it’s hard to find this type of growth and improving financial situation, and investors are willing to pay up for it.
Trading AMD Stock
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On July 10, I wrote, “3 Reasons AMD Stock Is a Buy Right Now.” In it, I covered the potential breakout over $58 and how it could send shares to ~$65. Of course, at the time, $87 was a pretty far ways off.
However, on the first day of the breakout, I flagged upside levels of ~$68 and ~$73. Trust me, I’ve had enough humble pie to know not to brag. Instead, I’m trying to underscore that the technicals can tell a big part of the story.
What are they saying now?
The recent strength has been emphasized both by the relentless rise in the stock price and the volume AMD has had on those upside days. The pattern consists of rally, consolidate, rally.
If AMD stock closes above $90, statistically speaking, the odds increase dramatically that shares will climb to $100 within the next 50 days. To get there it will need to contend with the 261.8% extension at $95.71.
That’s the upside in a nutshell: A close above $90 puts $95.71 and $100 in play. The downside is more complicated. The tremendous rally leaves key short-term moving averages like the 10-day and 20-day quite a bit below current levels.
A correction in a mild tape (that is, not an onslaught of selling the overall market) likely makes these moving averages support in the short to intermediate term. I’d love an eventual gap fill down toward the $68 to $70 area. Maybe we fill that gap down near $62.50, in which AMD stock is likely a buy for long-term investors.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Kenwell no longer held a position in any of the aforementioned securities.
