Why AMD's Overbought Shares Will Fall Further

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

Shares of Advanced Micro Devices Inc. (AMD) have been on a tear over the past six months, rising by nearly 50% to the highest level in a decade on Wednesday. But AMD's bull  run may fizzle fast. Its shares were down about 5% Thursday, ending the day at $14.89. An analysis of the technical chart shows AMD is way overbought. Including today's pullback, the stock is poised to plunge by as much as 12% from yesterdays' close. 

AMD can give heartburn to traders and investors. It's stock price has seen extreme volatility in 2018, rising by as much as 25% in February, plunging by 30% in April, and soaring by 50% since the start of May—a wild ride to say the least. 

AMD data by YCharts

Strong Resistance

The stock closed just slightly above technical resistance on June 6 and has been unable to maintain that breakout through mid-morning today, a bearish indication. The failed breakout attempt at resistance would suggest shares have further to fall, by perhaps more than 8% from its current price to technical support at $13.77. 

Overbought Levels

Additionally, the stock's relative strength index (RSI) has reached an overbought level, as high as 85 recently, a reading above 70 is overbought. It is the highest RSI reading in the past five years, going back to May 2013 when the stock was trading at only $4.25.

Big Growth Outlook

The outlook for AMD has been improving, and analysts are looking for significant gains from the company in 2018, with earnings seen climbing by roughly 168% to $0.45 per share, while revenue is seen rising by 25.5% to $6.68 billion. But despite the healthy growth outlook, analysts have an average price target on the stock of only $14.27, nearly 9% below the stock’s closing price of $15.67 on June 6. Additionally, only 42% of them rate shares at a buy or outperform.

Not Cheap

Additionally, shares of AMD no longer come cheap at its current price, with a one-year forward P/E ratio of 26, much higher than its peer group. Of the top 25 companies in the iShares PHLX Semiconductor ETF (SOXX) the average one-year forward P/E ratio is only 16. Even though the stock is expected to have significant earnings growth in 2018, it is forecast to slow to just 27.8% in 2019, giving the stock a growth adjusted PEG ratio for 2019 of 0.94, suggesting the stock may already be nearly priced to perfection. 

There is no doubting AMD's potential long-term growth opportunities, but that doesn't mean shares haven't run too far too fast. 

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.