AMD Roars into the Twenties

Having signed off on 2019 with a 150% rally, shares of Advanced Micro Devices (NASDAQ: AMD) roared into the new decade with a 2% gap up to open Thursday’s session. Nomura’s reiteration of a Buy rating surely helped things and they also raised their price target from $40 to $58. On the back of this, shares were trading at fresh all-time highs as buyers flooded in to get a piece of the action. This note from Nomura comes after RBC reiterated its Outperform rating at the end of December. They too pushed up their price target from $50 to $53 at the time.

The stock has been a dream hold for investors since the end of 2018 and since last October alone has tacked on almost 70%. The California based semiconductor company has certainly kept Wall Street on its toes in recent years with frequent triple-digit percentage rallies and double-digit percentage pullbacks. This current rally has been running hot since 2015 and anyone who bought into the hype it generated then and is still holding is enjoying an almost 3000% return. They would have had to have endured a 50% pullback in 2018 but that kind of action is to be expected with such hot name on the cutting edge of technology.

Can’t Keep a Good Stock Down

It says a lot about a company when they can report a miss on earnings and revenue in their quarterly report and still find their shares 5% higher within two trading sessions. That’s exactly what happened with AMD when they reported Q3 earnings at the end of October. Even though the topline numbers came in lower than expected, with revenue still being up 9% year on year and EPS up 22%, things are clearly going in the right direction.

As CEO Lisa Su said as much when she remarked, “our first full quarter of 7nm Ryzen, Radeon and EPYC processor sales drove our highest quarterly revenue since 2005, our highest quarterly gross margin since 2012 and a significant increase in net income year-over-year. We have the strongest product portfolio in our history, significant customer momentum and a leadership product roadmap for 2020 and beyond.”

The Bear Case

Despite all this positive forward momentum however, there are some bears who believe that shares are getting too far ahead of fundamentals. Northland Securities slashed their rating on the stock in November and issued a price target of $36. Analyst Gus Richard wrote that while shares will likely "melt-up between now and the end of the year, we would not be chasing them." While the melt-up into year-end has certainly happened and is, so far, continuing into 2020, it remains to be seen if Northland is correct with regards a coming pullback.

There’s concern that not enough credit is being given to AMD’s competitors in the chip space, namely Intel (NASDAQ: INTC). Bank of America was out early last month raising its price target for Intel’s shares from $65 to $70, on the back of competitive growth potential and monster $20 billion share buyback program. They’ve certainly been hot on the heels of AMD’s growth and their Q3 report in October showed a beat on both EPS and revenue expectations. Intel’s management also revised forward guidance to the upside.

Also behind the bear case is the fact that AMD stock has only had one down week since the end of September. As investors saw in September 2018, AMD is a stock that’s well able to cool off by up to 50% after a triple-digit percentage rally so anyone looking to get involved at these levels will need to be nimble.

Is The Stock Getting Frothy?

With that in mind, it’s worth noting that AMD stock is hot right now, both from an attractiveness standpoint as well as a technical standpoint. At 76 on the daily, RSI is certainly on the warm side but that’s both forgivable and bearable as shares push into blue sky territory. Things are a little hotter on the weekly, with RSI treading water above 80. If there is to be a pullback, it would likely be fast and angry and little more than standard profit-taking. The bulls will view it as a buying opportunity, the bears will view it as the start of their thesis coming to fruition.

The next big catalyst will be Q4 earnings, due at the end of the month. There’s no hiding behind top-line figures so Wall Street will be watching closely to see if the fundamentals support the current valuations.