(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Advanced Micro Devices Inc. (AMD) already has fallen 45% off its 2018 highs - and now it's poised to plunge even further. Options traders are betting that the stock will drop another 11% in the next few weeks. Such a decline would push down the shares 53% from their 2018 high, a stunning decline even to AMD traders accustomed to wild swings in the stock.
The technical chart directionally supports the options traders and suggests a decline of 10%. The bearish sentiment comes after the company issued weak third quarter results and weak fourth quarter guidance. That prompted analysts to slash earnings and revenue estimates, as well as price targets.
The bearish put options that expire on November 16 at the $17 strike price suggest that the shares will fall to roughly $16.10. That's because the number of bearish options bets outweighs bullish bets by about 5 to 1, with 7,100 open put contracts. Additionally, the puts at the $18 strike price also outweigh the calls by about 2 to 1.
The chart shows that the plunging stock is approaching a technical support level at around $16. Additionally, the relative strength index has been trending lower since hitting overbought levels above 70 in September. It suggests that momentum is leaving the stock.
As indicated, the negative sentiment is a result of a very weak third quarter. Revenue was 3% below estimates even though earnings exceeded expectations by a penny a share. As a result, analysts have cut fourth-quarter earnings estimates by 13% and revenue estimates by 7%. Revenue estimates for the full year and 2019 also have dropped.
AMD's stock has been on a roller coaster ride in 2018 and is still up by 73% on the year despite the stock's wild fluctuations. However, sentiment for the stock has turned negative. That momentum may be too hard to overcome in the short term, especially if the broader tech sector continues to sell off.
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.