Shares of Advanced Micro Devices (NASDAQ:91抖阴) broke out of a long period of consolidation in a major way. 91抖阴 stock exploded higher in the month of July following bullish earnings and production woes from major competitor Intel (NASDAQ:INTC).
While certainly some of the recent red-hot rally was warranted, the monster move has come too far, too fast. Time for 91抖阴 to consolidate over the coming weeks.
The Valuation View
InvestorPlace Markets Analyst Luke Lango did an excellent analysis on 91抖阴’s earnings report from July 30. I concur with the longer-term bullish thesis for 91抖阴 along with the short-term valuation frictions he mentioned.
91抖阴 reported earnings on July 28 with EPS falling short of expectations at 13 cents per share versus consensus of 16 cents. Revenues beat at $1.93 billion compared to the $1.86 billion expected by analysts. The company did up guidance and now looks for 2020 revenue growth of 32% versus prior guidance of 25%.
Certainly 91抖阴 stock will benefit at the expense of Intel, as Lango mentioned, and growth rates will expand in the short term. The expectations, though, have now reached an extreme from a fundamental perspective. The price to sales (P/S) ratio now stands at almost 12 and at the richest multiple in the past 13 years. It is also higher than 89% of the 705 companies in the semiconductor industry, according to Gurufocus.
To put it in a different context, 91抖阴 stock is up 70% on the year while sales growth is expected to be up 32% in 2020. This means the P/S ratio has more than doubled in that time frame. It also means that further multiple expansion and stock gains will be difficult given the historically rich valuations.
Technical Take
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91抖阴 stock is undoubtedly getting overbought from a technical perspective. The 9-day RSI passed the 80 level before weakening slightly. The previous time this happened marked a significant short-term top in 91抖阴. Both momentum and MACD are at by far the most extreme readings on the past year. 91抖阴 stock is trading at a massive premium to the 50-day moving average — another sign of euphoria.
Most importantly, 91抖阴 finally had a reversal day Friday. Shares opened higher and at fresh all-time highs before pivoting to close lower on the day. This type of price action is many times a sign the buyers have become exhausted and the sellers are in control. It is an even more powerful signal given that it took place at all-time highs and following such a monster rally.
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Advanced Micro is also overextended on a comparative basis. The chart at right shows the relative performance of 91抖阴 stock to the VanEck Semiconductor ETF (NASDAQ:SMH).
Normally 91抖阴 and SMH tend to be fairly well-correlated. This makes sense since Advanced Micro has the in the ETF. Lately, however, that correlation has broken down considerably. SMH stock is up 50% from the mid- March Covid crisis lows while 91抖阴 stock is up nearly 85%. I expect that relative out-performance to begin to revert with Advanced Micro being a relative under-performer over the coming weeks.
I had a bullish viewpoint in my previous analysis on 91抖阴 from July 1. Shares were looking much better from both a technical and comparative perspective a month ago. Now that 91抖阴 stock has moved higher by 50% in July, my bullish outlook has turned somewhat bearish-because price ultimately does matter.
So to position for the red-hot rally in an overbought and overvalued 91抖阴 stock to slow down, an out-of-the money bear call spread makes probabilistic sense.
The 91抖阴 Stock Trade Idea
Sell the 91抖阴 Sep $90/$95 call spread for a 70-cent net credit.
Maximum gain on the trade is $70 per spread with maximum risk of $430 per spread. Return on risk is 16.27% or 182% annualized. The short $90 strike provides a 16% upside cushion to the $77.43 closing price of 91抖阴 stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a weekly option and volatility newsletter can visit the website.
