(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Advanced Micro Devices Inc. (AMD) stock may be poised to rise by more than 15% by early next year based on recent options trading. Should that happen, the stock could rise to levels last seen more than a decade ago. The bullish betting comes amid optimism that the company can continue to deliver strong earnings and revenue growth over the next two years.
Over the past year, AMD’s stock has been on a roller-coaster ride, and at one point lagged the S&P 500 by nearly 40 percentage points, but now shares are outperforming the index with the stock up by 20% to the S&P 500's rise of only 13.7%. Traders are anticipating the see-saw ride to continue, with the potential for significant price swings. Additionally, the bullish options bet come despite the stock's weak technical setup, with bullish momentum leaving the stock and volume levels that have been steadily declining in recent weeks. (See also: AMD Seen Falling 11% Despite Traders' Bullish Bets.)
Options traders are betting shares of the stock will rise by over 15% from its current price of $16.80. Using the $17 strike price, bets that shares of AMD will increase by expiration on Jan. 17 outweigh the number of wagers that the stock will fall by about 2 to 1, with nearly 30,000 open call contracts. With the price of the $17 calls trading at $2.50 per contract, AMD's stock would need to rise to $19.50 or more for the buyer of the calls to break even if held until expiration.
One group of traders are even betting the stock may rise by over 27% to $21.50, based on the $20 strike price calls, by the middle of January.
What is striking is the level of volatility that the options traders are pricing into the stock. The long straddle options strategy implies a rise or fall of about 29% from the $17 strike price, placing the stock in a trading range of $12.10 to $21.90.
Analysts are forecasting significant earnings growth for AMD over the coming two years, with earnings set to climb by 30% or more in 2019 and 2020. But the thing that may be most hanging over AMD is its expensive stock price compared to other chipmakers: AMD currently trades at 28 times 2019 earnings estimates.
The bullish outlook for AMD comes as the fundamental outlook for the business continues to strengthen. But for the optimism of the traders to come to be justified, the company will need to do more than just deliver.
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.