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Advanced Micro Devices (NASDAQ: AMD ) is back at the highs. The AMD stock price cleared $33 last week, something it's managed to do a few times in the past year. Each time, those levels have proven to be bad news for Advanced Micro Devices stock.
AMD stock got there for the first time last September, reaching a 12-year high at the time. It immediately dipped. After two more tries, the chip sector as a whole collapsed. The AMD stock price went from $33 to $17 in a matter of weeks.
AMD stock briefly touched $34 last month. It fell promptly declined 15% over the next five sessions.
It's pretty clear that levels around $33-$34 have proven to be resistance for the AMD stock price. The question now, particularly with Q2 earnings on the way in two weeks or so, is whether this time will be different.
The Risks to the AMD Stock Price
There are three reasons to see current levels as potentially risky for Advanced Micro Devices stock. The first is precisely that history, particularly in the context of chip stocks more broadly. Big earnings from Micron (NASDAQ: MU ) have helped boost the sector in recent weeks, admittedly.
But semiconductor stocks have seen quite a bit of volatility over the past year. Micron may have touted optimism - but Broadcom (NASDAQ: AVGO ) did largely the opposite . Even before those reports, this has been a space where investors are best off zigging while the market zags, buying when sentiment turns sour and selling when optimism returns. That's held for AMD as well, obviously, given the stock has doubled from December lows.
As such, resistance here may be firm. And that risk is buttressed by fundamental concerns. As I wrote last month, at those June highs, AMD stock isn't cheap . It trades at over 32x next year's consensus EPS. The average Wall Street price target still sits below the current price.
Analysts don't always have it right, obviously (that's been particularly true in the chip space over the past eighteen months), but 32x is a big multiple for chip stock. Investors in Nvidia (NASDAQ: NVDA ) learned what happens when an investor overpays for growth in such a cyclical industry. If only on a short-term basis, investors in Advanced Micro Devices have learned the same lesson a few times.
And the third risk for AMD is the earnings report on the way, likely at or around the end of this month. Expectations clearly are high. AMD has stumbled after earnings in the past - most notably with a 22% decline after the Q3 report in October. AMD needs a big quarter to keep a repeat from occurring this time around.
The Case for Advanced Micro Devices Stock
The simple answer to all those worries is: so what? AMD stock has climbed the "wall of worry" for years now. After all, this was a $2 stock as recently as 2016, with real fears that the company might eventually declare bankruptcy.
That's obviously no longer the case. AMD's new chips have made it a formidable competitor to Nvidia and Intel (NASDAQ: INTC ). Intel's repeated mistakes only increase the possibility of more market share gains, more growth, and a higher AMD stock price. And those self-inflicted wounds at AMD's key competitor, along with reports of strong PC sales , suggest Q2 numbers will be impressive.
Broadly speaking, this simply is a much better business than it was, and it's a really good business on its own. The "old" Advanced Micro Devices was a second-tier provider of chips for low-priced PCs. But it's now a more diversified player in terms of both PCs and growing end markets like data centers. AMD stock might not be cheap, but it shouldn't be cheap.
The Bottom Line on Advanced Micro Devices Stock
Both sides can make a strong case at the moment, which makes Q2 earnings particularly important. Technically and fundamentally, AMD stock is likely to move further in whatever direction it trades after the report.
Big numbers lead to higher earnings estimates and likely a series of analyst upgrades that can further goose the stock. That, in turn, pushes AMD through resistance, which usually (though not always) triggers higher prices.
Anything less, however, and history suggests Advanced Micro Devices stock could have a problem. We've seen AMD move from $33+ to under $30 in a blink. Bad news, or even an outlook that doesn't quite match currently optimistic expectations, could do the same, or worse.
All told, I'd expect that a month or two out, AMD stock isn't trading at $33. But which way it moves will depend largely on what kind of story Advanced Micro Devices can tell with its second-quarter report.
As of this writing, Vince Martin has no positions in any securities mentioned.
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