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

Shares of Advanced Micro Devices Inc. (AMD) have soared three-fold since April. But technical analysis suggests the shares have hit overbought levels and could plunge by 21 percent from the chipmaker's current price of around $32.90.

The stock has risen on hopes the company can deliver big earnings growth over the next three years. In fact, the stock has posted massive gains in the past, and in those cases the results were not pretty. But this time may be different, and the pullback may lead to a longer-term rise if AMD is able to achieve its growth plans.

Momentum Leaving The Stock

 

Shares of AMD surged to nearly $34.50 on September 13, prices not seen since May of 2006. But the stock failed to advance after hitting  technical resistance at that price and has dropped by more than 6 percent. Now, shares look like they may go even lower to a technical support level of around $25.70, a drop of over 21 percent. That is because momentum is moving out the stock.

The relative strength index (RSI) has been in overbought territory of around 70 since the end of August. In fact, the RSI has hit levels as high as 87, three times. 

Troubling Signs

This is not the first time AMD's stock has seen a parabolic rise, happening in the year 2000 and 2006. The weekly chart shows the RSI today is even higher than in previous years.

 

 

 

Big Earnings Estimates

One reason for the recent exuberance is forecasts for massive earnings growth in the coming years. Earnings are estimated to climb by almost threefold in 2018. Earnings growth - although slower in 2019 - is forecast to rise by more than 40 percent, followed by an increase of 39 percent in 2020.

 

AMD Annual Revenue Estimates Chart

AMD Annual Revenue Estimates data by YCharts

Revenue Growth May Not Be Enough

Revenue is forecast to grow by 26 percent this year to $6.7 billion while slowing to 10 percent in 2019 and 13 percent in 2020. To reach analysts' big earnings estimates, the company will need to reduce costs. 

No matter what happens, one thing is clear. As always with AMD's stock, option trades indicate huge volatility in coming weeks.

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 holdingsInformation 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. 

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