Buy Advanced Micro Devices, Inc. (AMD) Stock for Big Rebound Profits

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Advanced Micro Devices, Inc. (NASDAQ: AMD ) has been nothing short of a roller coaster ride in May, and long-suffering AMD investors have been feeling the heat. But a breeze is blowing, and AMD stock is putting together what could be the start of a recovery.

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AMD's debacle begun when the company reported lower-than-expected revenue growth on May 1 that led to shares tanking nearly 25% - the stock's worst one-day selloff in a decade.

But the chipmaker slowly managed to pare back a good chunk of those losses after rival Nvidia Corporation (NASDAQ: NVDA ) blew Q1 earnings estimates out of the water and proved that the GPU space was alive and well.

AMD Stock Flies Out of the Traps

Advanced Micro rallied 12% two days ago after it unveiled the Epyc server chip that was accompanied by fresh rumors that IntelCorporation (NASDAQ: INTC ) was prepping a GPU licensing deal with AMD after its old deal with Nvidia expired in March 2017. Heavy options volume as well as heavy interest in May $12 calls and puts were the main feature of the day.

But that was just as well, because the party was frozen in its tracks sooner than it started. AMD stock tanked 12% on Wednesday after Intel came out with a straight-up denial of the licensing deal, terming the rumors "untrue."

The denial coincided with negative reaction to Advanced Micro Devices' analyst day by Wall Street. In the presentation, AMD had painted a rosy picture of how it was gearing to compete in the high-end data center market, one that enjoys nearly two-thirds of all margin dollars despite representing just 15% of the volume.

Unfortunately, the report came up short where it really matters - hard numbers.

Buying the Rumor, Selling the News

The latest selloff by AMD stock was a classic case of investors buying the rumor and selling the news. The rumor mills seem to be particularly adept at manipulating AMD stock, such as when the stock rallied hard in December after Jim Cramer made it his No. 1 pick in his top 10 list of takeout candidates in 2017 . Merger mania makes it possible to play merger arbitrage, but that's a risky game for investors to play.

The purported AMD-Intel deal was built on cheap speculation and was doomed to come crashing down like a house of cards. The rumor surfaced about a year ago and was embellished by tech sites such as ExtremeTech, which reported that Intel had an ongoing $1.5 billion patent licensing deal with Nvidia that was set to expire on March 17, 2017. Fudzilla was the latest site to fan the rumor, saying:

"It is more likely that Intel has a license from AMD but neither company has officially announced it. … If you are in Intel's shoes, there are two options, Nvidia or AMD."

Fudzilla framed it in such a way that investors were led to believe that Intel had little choice in the matter than to put AMD's tech in its graphics cards. Savvy investors, however, were careful not to take that to the bank. After all, March 17 had come and gone yet we had not heard any reports about disruption in the production of Intel chips.

Naturally, you would have expected Intel to cozy up to AMD and sign a new patent deal with the company well before the Nvidia arrangement came to an end.

Curiously, investors also failed to question why the Nvidia-Intel cross-licensing deal, signed in 2011 according to this SEC filing , was set to expire after just six years, whereas patents are usually enforceable for 20 years.

Bottom Line on AMD Stock

Advanced Micro Devices has all the trappings of a pump-and-dump stock, and to invest successfully, you have to learn to tune out market noise. When you look at the fundamentals of AMD stock, you will discover that this is hardly the falling knife that the bears claim it to be.

The chipmaker endured a difficult period between 2014 to 2016 when it went through a severe revenue contraction. Luckily, the company managed to come out of the slump thanks to its strong innovative DNA.

Its latest Epyc chip features a Zen core and eight memory channels and could help AMD win significant data center business. Strong data center sales are part of the reason why Nvidia stock is so hot. Indeed, Hans Mosesmann of Rosenblatt Securities reckons that Epyc, with its single socket, will disrupt the standard two-socket data center infrastructure by the likes of Intel. Mosesman has given AMD stock an ambitious price target of $20.

Advanced Micro reported top line growth of 18.3% for the last quarter - hardly shabby by any yardstick despite narrowly missing consensus estimate by $380,000. Further, the company targets a 14%-20% revenue increase for the second quarter. If Epyc becomes a hit with cloud customers as expected, AMD could see a surge in sales likely starting from the latter half of the year.

At the time of this writing, AMD stock has a Relative Strength Index (RSI) reading of 40, meaning it's very close to oversold territory. It was also starting to claw back some ground after Wednesday's losses.

AMD might not remain in the woods very long. Patient investors who buy now while the chips are down could end up being rewarded.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.

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The post Buy Advanced Micro Devices, Inc. (AMD) Stock for Big Rebound Profits appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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