In little more than a year, Advanced Micro Devices, Inc. (NASDAQ:AMD) stock mushroomed from $2 a share to $15 a share. You can compare it to the lofty standards of just about any other momo stock on the market — that’s quite a meteoric rise. And what followed was to be expected: A pullback in AMD stock.
The problem is, the ups and downs are continuing to the point where Advanced Micro seems very much in limbo. That’s fine for traders who are happy chasing swings, but long-term investors have some serious decisions to make about either taking significant profits if they’re still long, or risking catching a falling knife if they’re on the outside looking in.
We’ll try to make some sense out of it.
A Timeline
Here’s a quick look at the nauseating past few months of AMD stock since it closed at a 10-year peak of $15.55 in late February:
- A nosedive to $13 in early March
- A run back up to $14.60 in early April
- A dip below support at $13 two weeks later
- A big gap down to $10 on huge selling volume after a disappointing earnings report in early May
- A recovery to $12.75 two weeks later
- A dive back down below $11, where we stand today
Here’s the visual representation of that mess:
If you’re scoring at home, that’s a 46% trading range in a span of just three months. AMD’s beta currently sits above 3, which essentially means the stock is three times more volatile than the S&P 500.
Which Way Will It Go?
Advanced Micro Devices is caught in a nasty tug-of-war right now in which both sides have had the upper hand, but only briefly.
The technical picture doesn’t provide much hope. Shares haven’t traded above their 50-day moving average in nearly two months, meeting resistance there on two separate occasions. AMD stock is now leaning on its longer-term 200-day MA as support — but if that breaks, this could get ugly in a hurry.
Optimists, however, can be found poring at the fundamentals.
Sales are improving, with AMD posting three straight quarters of double-digit top-line growth. Losses have narrowed to just 8 cents per share in the most recent quarter, and the company expects to make a profit in the full year. Importantly, margins are holding steady.
Top- and bottom-line estimates for 2017 and 2018 are rosy thanks in part to new technologies such as the Ryzen CPU and the soon-to-launch Naples server CPU and Vega GPU (graphics processing units), which should begin to bear fruit in the coming months.
Advanced Micro Devices has lost PC graphics market share to Intel Corporation (NASDAQ:INTC) as of the first quarter this year. But for the past couple of years, the trend has been broadly up for AMD, and down for INTC as the smaller chipmaker eats at Intel’s lunch.
Meanwhile, analysts anticipate double-digit sales growth this year and next, which would be the first time that’s happened in more than a decade. And the company is expected to turn profitable again this year and improve on those profits next year.
AMD Stock Will Calm Down … Eventually
This rosy picture is plenty of defense for the past year or so of breakneck gains. The problem is, for now, AMD is a victim of its own recent success.
When a stock rises really far, really fast, jittery investors start looking for any reason to duck out and cement their gains. For instance, when Advanced Micro reported earnings in May, lower-than-expected gross margin guidance and in-line sales and EPS were all the reason Wall Street needed to severely punish shares.
The volatility is keeping would-be buyers from flooding back in, driving fears that trying to catch the falling knife will result in quick, significant losses. Then there’s valuation to consider — a forward price-to-earnings ratio of 36 is expensive in a bubble, but is it really that lofty for a company expected to flip to a profit after years of losses, then more than quadruple that profit in the following year?
If you’re looking for AMD stock to settle down completely before jumping in, you’ll never end up being a buyer. Volatility will continue to be the norm for several quarters until Advanced Micro has a few more solid earnings reports under its belt.
But AMD shares are a bargain right now, and the fundamental picture is starting to catch up. This chipmaker will test your nerves, but longer-term, it should pay off in spades.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
