Advanced Micro Devices (NASDAQ:AMD) has been an absolute beast on the long side. Despite that truth, AMD stock can actually be pretty tough to trade at times.
The stock tends to go on sharp, robust runs and then consolidate for quite a while. However, patient bulls in this stock continue to be rewarded. That’s exactly what I’ve been pounding the table on — patience.
If there’s one industry — or one duo — that I have a good pulse on, it’s AMD and Nvidia (NASDAQ:NVDA). Both of these companies are incredibly well run and while the stocks don’t always reflect their great businesses, the share prices eventually reward shareholders.
With AMD, the writing was all over the wall — almost literally.
Trading AMD Stock
Going into earnings in July, I made the case to own AMD stock regardless of the earnings outcome. A few days later, Advanced Micro Devices reported strong earnings and the stock exploded to new all-time highs as a result.
This triggered a massive breakout over the $99 to $100 level, but that was followed by a somewhat disappointing 18% correction back to this breakout area.
Like I said though, the bullish clues that new highs were coming were written all over the charts. We never forgot the massive volume that accompanied the stock’s post-earnings rally.
Save this chart. Bookmark this article. Whatever you need to do to imprint this image in your mind, because this is what “accumulation” volume looks like.
That’s when institutions pile into a stock, leaving their “footprints” all over the chart in the form of volume. This had the hallmarks of institutional accumulation. While that doesn’t guarantee new highs necessarily, it’s a decent bet that it means, “there’s more where that came from.”
AMD found support at the prior $99 to $100 breakout zone before giving a powerful weekly-up rotation. That may very well have led to one of the best trades of the year. Further, it helped kick-start an absolutely massive secondary trade in Nvidia, which paid off quite well too.
Finally, AMD stock gave bulls a nice reset to start off November and the stock responded with a 19.5% burst. Rarely do we get to double dip in a trade like this, catching a bulk of the upside and then catching the downside reversal.
So, What’s the Trade?
From here, we need to give the stock a rest. For traders, that means trimming into strength and/or raising their stop-losses. For investors, it means appreciating the move, but expecting potentially sideways-to-lower price action in the short to immediate term.
Am I bearish? Absolutely not. But am I cognizant that Nvidia and AMD are up 50% to 60% over the past six weeks and that action can only last so long? Yes.
Bulls have been quite fortunate in this name. I’m hoping the above chart can serve as an educational tool to readers. It highlights the following:
- A massive upside rally with accumulation volume. Learn to spot these!
- A pullback to the prior breakout zone.
- The weekly-up trigger that launched AMD higher, then the ensuing “reset” trade that sent AMD to new all-time highs.
- Lastly, the reversal trade that let bulls exit the trade with monstrous gains and gave aggressive traders a short-selling opportunity.
Betting on AMD’s Long-Term Future
AMD stock just gave bulls one of the best trades of the year. The best part about all of this is that the company continues to deliver on the fundamentals too.
It’s a very mixed and mostly downbeat situation for growth stocks. Many of the best growth stocks are well off the highs right now, but not AMD and Nvidia. Both stocks remain superior to picks like Intel (NASDAQ:INTC) too. They are real outliers, outshining growth and value stocks.
That’s because consensus estimates continue to underestimate what AMD and Nvidia are doing right now. Nvidia just delivered a top- and bottom-line beat and better-than-expected guidance. AMD did the same thing, while delivering 54% revenue growth.
The more that technology grows, the more that companies need better components. Increased data means increasing data center performance. That equates to more orders for AMD and Nvidia. This new push for the “metaverse” has AMD in demand too. So do computer graphics, gaming, AI and machine learning applications, autonomous driving — you name it. There are countless end markets for GPUs.
If there’s one fly in the ointment, it’s future growth concerns.
With one quarter left to go for this fiscal year, analysts expect AMD to grow sales 19.5% next year, then 14% in the following year. Some might say the stock has rallied too far given these estimates. Maybe so. And in that case, we may see a multi-quarter consolidation phase, which most long-term investors are fine with.
But it’s also possible that these estimates are too conservative.
In late July, 2022 revenue estimates sat at about $17 billion. After earnings in July, they shot up to $18 billion. After the last report in October, these expectations moved above $19 billion. You can see how this theme has been playing out.
For now, I still have no reason to bet against AMD (or Nvidia) even though it’s clear that the stocks need a break.
On the date of publication, Bret Kenwell held a long position in NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.