AMD Analysts See 20% Stock Gain Despite Red Flags

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Sell-side analysts are getting excited about Advanced Micro Devices Inc. (AMD) and expect the stock to rise by nearly 23 percent in 2018 to roughly $14.60 from its current price of about $12.10. The optimism comes on the strength of AMD's Ryzen GPU and EPYC embedded processors. Should the stock climb to $14.60 as analysts project, it would get within striking of its five-year highs set in early 2017. 

Despite the exuberance of some analysts, the rest of the market seems to be more skeptical, with short interest near five-year highs, bearish options betting, and a weak technical chart. 

Rising Estimates

Analysts have increased their revenue estimates for the first quarter of 2018 by 25.1 percent, and now expect the company to generate 1Q revenue of $1.55 billion. That would represent a 58 percent year-over-year growth, and slowing growth of roughly 18 percent for the full year. 

AMD Revenue Estimates for Current Quarter data by YCharts

Growing Optimism

With the prospect for better growth, price targets on Advanced Micro's stock have also risen. Analysts had previously set a price target of $14 at the start of 2018, which is about 6 percent lower than the current target. 

Wells Fargo recently noted that the company is poised to see market share gains this year from its new embedded EPYC and Ryzen chips. Since the beginning of the year, the number of sell recommendations has fallen to 14 from 17, while the number of buy recommendations has climbed from 8 to 9. 

AMD Buy Recommendations data by YCharts

Bears Are Lurking

But all is not roses, as options traders do not have the same level of enthusiasm as the analysts covering the stock. The options that expire on January 18, 2019, suggest a hint of bearishness, with the $12 strike prices showing a put-to-call ratio of nearly even. 

Meanwhile, the $10 puts have an open interest of about 136,000 contracts, with a dollar value of almost $15 million. Meanwhile, the $15 calls carry an open interest of approximately 87,000 contracts, worth only $11.8 million. 

Technically, Advanced Micro Devices stock has had trouble rising, and could see a significant rise above $14. The one attempt early in 2018 saw the stock climb to roughly $13.85. 

In yet another sign that the bears are lurking, short interest for the stock is at nearly five-year highs, representing almost 21 percent of the float. (See also: What Exactly Is a Company's Float?)

AMD Short Interest data by YCharts

Despite analyst optimism, which comes with good reason, the rest of the market is flashing warning signs. The tug of war between the bulls and the bears could make for an interesting ride in 2018 for Advanced Micro Devices. (See also: The New Threat Facing Nvidia, AMD.)

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.