October was a busy earnings month for tech stocks One of the many tech names that reported results last month was chip maker Advanced Micro Devices (NASDAQ:AMD). On Oct. 29, AMD reported robust fiscal third-quarter results.
In 2019, AMD stock price is up about 99%. In comparison, the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is up 57%. Therefore, many investors are now wondering if Advanced Micro Devices stock could rise even further in the last quarter of the year.
I believe AMD may be one of the best semiconductor stocks to own and that AMD stock price is going to increase much more in the long-run. Nonetheless, in the short term, there may be some profit taking in AMD stock. As a result, long-term investors may get better entry points in AMD stock down the road.
Investors Cheered AMD’s Earnings Report
In 2019 Advanced Micro Devices launched a robust range of products which Wall Street and AMD’s customers liked. Yet until its Q3 results, the company had a history of reporting mixed results.
Q3 was in some ways not much different. AMD stock missed analysts’ average revenue estimate, and its profit was only in-line with Wall Street’s average outlook However, management delivered strong growth versus Q2.
Revenue hit $1.80 billion, and its operating income was $186 million. With net income of $120 million, diluted earnings per share came in at 11 cents.
In Q3, AMD ‘s revenue grew 9% YoY and 18% quarter-over-quarter. Its gross margin expanded to 43%, up three percentage points YoY, a number that pleased analysts.
Therefore, many investors are now hopeful that the semiconductor sector’s cycle might have bottomed and that AMD”s earnings may have become more consistent starting with Q3.
Investors primarily focused on two of AMD’s segments: 1) computing and graphics and 2) enterprise, embedded and semi-custom.
The computing and graphics segment’s revenue was $1.28 billion, up 36% YoY. Its higher revenue was primarily driven by increased sales of its Ryzen processors, which are based on a 7 nanometer manufacturing process.
Intel (NASDAQ:INTC) dominates the central processing unit (CPU) space. Yet analysts think that AMD’s Ryzen central processing unit CPUs surpass Intel’s offerings in power efficiency and at competitive pricing structure.
The revenue of AMD’s enterprise, embedded and semi-custom segment came in at $525 million, down 27% YoY and down 11% versus Q2.
Overall many analysts saw the earnings report as a sign that AMD is executing its strategy well. Since late 2014, under the leadership of CEO Lisa Su, AMD’s revenue has increased and the company has improved its balance sheet. It has also reduced its debt considerably.
What Could Derail AMD Stock in the Short-Run?
Like most other semiconductor stocks, AMD stock is highly volatile, and its share price is easily affected by the developments of the industry and of the overall tech sector.
In the coming weeks, if any chip company, such as Nvidia (NASDAQ:NVDA) or Intel, issues a negative update or a quarterly report that includes weak guidance, then investors could easily become bearish on semiconductor stocks, including AMD stock.
NVDA has been a leader in the graphics processing unit segment. But this year, AMD has been able to gain market share from both Nvidia and Intel. Therefore, the fates of many companies in the sector are intertwined.
Furthermore, analysts are debating whether Advanced Micro Devices stock is becoming overvalued. For example, its trailing price-earnings-growth ratio is about 3.5, versus the industry average of around 1.9. Similarly, AMD stocks’s price–sales ratio of about 6.6x is also quite high. By contrast, the S&P 500’s average P/S ratio is 2.2x.
So in the final weeks of the year, investors who have benefited from the rallies of AMD stock may decide to take money off the table.
Where the AMD Stock Price Is Now
Wall Street loves turnaround and growth stories. Over the past several years, the AMD stock price has gone from $2 in early 2016 to an all-time high of $37.18 on Nov. 5.
Before its Q3 report, AMD stock had strong resistance around $35, In other words, in the coming weeks, if AMD stock price can stay over $35, investors can expect another move up in the shares.
However, in November AMD stock is likely to trade within a range of about $32.50-$37.50. If the stock market declines before the end of the year, AMD stock price can easily move toward $30.
Because AMD is a momentum stock, investors should expect sizable daily swings in the stock price. AMD usually rallies and then trades in a range for awhile. This trend is likely to continue in November.
If you already own Advanced Micro Devices stock, you might want to stay the course and hold onto your position. Or you may consider placing a stop loss about 3%-5% below the current price point. This strategy will enable you to ensure you take most of the paper profits you have already made from Advanced Micro Devices stock.
If you are an experienced investor in the options market, you may also consider using a Dec. expiry at-the-money covered call strategy. In that case, you may, for example buy 100 shares of AMD at a limit price of around $36 and sell an AMD Dec 20 $36 call option, which, as of this writing, trades at $2.15.
The $36 option offers some downside protection in case of volatility and a decline of the AMD stock price. It would also enable investors to participate in a potential rally. This call option stops trading on Dec. 20 and expires on Dec. 21.
The Bottom Line on Advanced Micro Devices Stock
I believe that AMD’s Q3 earnings and investors’ reaction confirm that the long-term bullish trend of AMD stock is likely to continue. Since the company also has high margins, I am upbeat on its long-term outlook. So far in 2019, Advanced Micro Devices has made impressive progress in the CPU and GPU spaces. Its data-center GPU business is especially likely to gain further momentum in coming quarters, and its new 7nm products are likely to generate strong sales
In case of a near-term decline in the share price, potential investors may consider investing in Advanced Micro Devices stock.I expect AMD stock price to reach $45.
As of this writing, Tezcan Gecgil holds INTC covered calls (Nov. 8 expiry).
