(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Advanced Micro Devices, Inc. (AMD) has seen a sharp decline since peaking at the end of January, falling by roughly 19% to approximately $11.10. But shares could be set to drop even further, as the stock approaches a critical technical support level at $11.20, while the options traders continue to pile on bets that shares will continue to decline.
An Investopedia article on March 5 noted a big surge in bearish option betting, and since that time, shares of AMD have fallen by about 6%. But despite the recent declines in the stock, the number of open puts has not seen a material decrease. Add to that the stock is currently the fourth most expensive stock of the top 25 holdings in the iShares PHLX Semiconductor ETF (SOXX), behind only Nvidia Corp. (NVDA), Xilinx, Inc. (XLNX) and Maxim Integrated Products (MXIM), it gives the traders good reason to bearish. (For more, see also: AMD May Fall 17% as Bearish Option Volume Soars.)
The chart shows how the stock currently rests at a relatively significant technical support level around $11.20. Should shares of the stock meaningfully fall below that support, it could trigger a wave of selling to roughly $10.70, a decline of about 4%. But given a relative strength index (RSI) reading that still rests near 40, a further decline would be needed to bring the stock to oversold conditions. This means the shares will retest the lows seen in late December around $9.80, a drop of about 12% from its current price.
The options set for expiration on April 20 at the $11 strike price have nearly 247,000 open put contracts, versus only 28,600 call contracts. At $0.53 per contract, it represents a notional value of about $13 million, a sizable bet. But despite the price of the stock declining by about 6%, the open interest in those contracts has not diminished, in fact, it has risen, and that could mean traders are looking for further declines.
To make matters perhaps more challenging for the stock is that it is the fourth most expensive stock in the group trading on a one-year forward multiple of 21 times 2019 forecast of $0.52 per share. The group is currently trading at an average of 16 times one-year forward earnings, with a median of only 14.5. Making things challenging is that the company is expected to grow earnings by 42% in 2019, on revenue growth of only 8%. It puts a lot of pressure on the company to control margins and expenses. (For more, see also: AMD: The Long-Term View.)
For now, the bets are continuing to stack up that AMD's stock is likely not finished falling over the short term.
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.