Advanced Micro Devices (AMD) Breaks Out to All-Time High

Advanced Micro Devices, Inc. (AMD) stock rallied out of three-week resistance in the mid-$80s on Monday, closing at an all-time high above $90. The breakout continues a torrid advance that has posted a phenomenal 250% return since the March low in the mid-$30s. The psychological $100 level marks the next upside target, but continued troubles at rival Intel Corporation (INTC) could keep a bid under AMD stock for months to come.

Key Takeaways

  • Advanced Micro Devices stock could trade up to $100 in coming weeks.
  • The chip manufacturer is capitalizing on systematic issues at rival Intel.
  • AMD stock is extremely overbought after rallying 250% since the March low.

The stock gained substantial ground in July and early August after the company handily beat second quarter 2020 top- and bottom-line estimates, super-charged by a jaw-dropping 45% year-over-year sales increase in the flagship Computing and Graphics division. Smaller divisions posted healthy quarterly sales as well, while AMD provided higher third quarter revenue guidance and is now looking to book between $2.45 billion and $2.65 billion.

Intel has pushed out the release of 7nm-based CPU processors, allowing its smaller rival to step in and grow market share for highly competitive next-generation chip sets. Graphics processing unit (GPU) sales are also exhibiting strong growth, with the COVID-19 pandemic underpinning demand for chips from AMD and rival NVIDIA Corporation (NVDA). AMD is now well positioned to capture significant market share after years of mixed press about graphics chip performance.

Wall Street consensus has grown more cautious on AMD in recent months, with outsized returns and the price-to-earnings (P/E) ratio of 176 raising legitimate questions about valuation. The stock is currently rated as a "Moderate Buy" based upon 13 "Buy," 12 "Hold," and 1 "Sell" recommendation. Price targets range from a low of $50 to a Street-high $120, while AMD will open Tuesday's session about $10 above the median $81 target.

Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.

Advanced Micro Devices Long-Term Chart (2009 – 2020)

AMD stock sold off to a multi-decade low in the single digits in 2009 and tested that level in 2012 and 2015, completing a broad triple bottom reversal. It rode NVIDIA's coattails into a new uptrend during the Bitcoin mining craze, lifting into the mid-teens in 2017. AMD cleared that resistance level in the second half of 2018, entering a channeled advance that broke out above resistance at the 2000 "bubble" peak in the upper $40s at the start of 2020.

The first quarter's pandemic-driven decline sliced through new support in March, but a strong bounce into the second quarter lifted price back to the February high, ahead of a powerful July breakout that has posted a string of all-time highs. Short-term price action is showing no signs of fatigue despite strong upside, setting the stage for the stock to trade in the triple digits for the first time since it came public in 1972.

However, there are reasons to be cautious as we head toward the fourth quarter. For starters, the stock posted an August monthly price bar 100% outside the top 20-month Bollinger Band®, set to the default two standard deviations. This is a classic sell signal, although many issues hit three and four standard deviations during the internet bubble 20 years ago. In addition, the rally is nearing the 2.618 Fibonacci extension of the first quarter decline, marking an extreme level that also raises the odds for a reversal and deep correction.  

A triple bottom is a bullish chart pattern used in technical analysis that is characterized by three equal lows followed by a breakout above the resistance level.

The Bottom Line

Advanced Micro Devices stock broke out above August resistance on Monday and is setting its sights on the psychological $100 level.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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