Bargain Alert: AMD is on the Verge of a Massive Catchup Play

Key Points

• Shares of AMD have diverged from both their semiconductor peers and the broader market in recent weeks.
• However, it looks like they’re starting to consolidate and momentum has swung to the bulls. 
• Investors should be watching for another run of green days into next week, which could single the comeback has started.

Having popped to a fresh all-time high at the start of last month, it looked like shares of Advanced Micro Devices Inc NASDAQ: AMD were going to keep rallying through the end of the quarter. However, having fallen as much as 23% since then, they’ve definitely started Q2 on the back foot, and investors are wondering if this is just a healthy, though slightly scary, pullback or if it could be the start of a broader downtrend. 

It’s worth noting that while AMD was trading down, the rest of the market, as seen through the benchmark S&P 500 index, was trading up. Considering how closely aligned it had been, this was an interesting divergence. For context, the S&P 500 notched a fresh all time high just last week.

Divergence From Competitors

Sure, AMD’s biggest semiconductor competitor, Nvidia Corporation NASDAQ: NVDA, has also yet to top the high it set at the start of March, but unlike AMD, it made another run at it just last week and came very close. Heading into the final two trading days of the week, Nvidia shares are hovering less than 10% below last month’s peak; nothing a stong up day wouldn’t take care of. 

So, what’s the deal with AMD? It’s undoubtedly benefited from the advent of artificial intelligence (AI) in the past year, with a March-to-March gain of 190%, but has struggled at times to match the sheer forward momentum of Nvidia. 

Troubles With China

Its footprint into China is one such example. While Nvidia is about to begin mass production of its AI chip for the Chinese market, AMD is still struggling to get approval from the U.S. Bureau of Industry and Security. This news, which came out this time last month, was a key driver in the stock’s divergence throughout March.

It didn’t help that the Chinese government then announced that they were considering blocking the use of AMD microprocessors in China altogether. Intel Corp NASDAQ: INTC also found themselves on this list, but Nvidia did not, and they’re on track to begin production for the Chinese market this quarter. 

While it’s not yet definitive, the possibility that AMD will be excluded from China, assuming it can even get the green light to sell there, has understandably spooked investors. But with shares having failed to set a new low in almost two weeks, there’s definitely a sense that the worst-case scenario has been baked in, and they’re not starting to consolidate. 

As of Wednesday’s close, they were up 5% of that low, with some clear momentum beginning to emerge on the bid. The stock's relative strength index (RSI), a measure of its overbought or oversold, has halted its downward spiral and is starting to trend north, as is the stock’s MACD. Both of these are considered reliable indicators of a stock’s recent trading momentum and can help support a thesis that momentum is swinging from the bears to the bulls. 

Bullish Factors to Consider 

There’s also the fact that AMD has avoided getting a single downgrade in the past month, despite this new development. In fact, it has to be said that only three weeks ago, the teams at Mizuho and DZ Bank were reiterating their Buy ratings, with Mizuho even boosting their price target from $200 to $235. 

With AMD shares finishing out Wednesday just shy of $181, this points to a targeted upside of some 30%. It is, for sure, an interesting time to be on the sidelines considering a position here. With the rest of the market continuing to trend north and the most recent analyst comments reiterating the strong upside potential, it has to be said that there’s a clear catchup play starting to emerge. Investors should watch for AMD shares to continue logging green days into next week, with a close above $188 suggesting the rebound has well and truly started.