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Summary

  • AMD short interest has increased by biggest amount in last 12 months.
  • Low short ratio implies that this isn't a crowded trade.
  • $2.50 price target remains on track.

I last wrote about Advanced Micro Devices (NYSE:AMD) in January when the stock was at $4.50. In that article I suggested that AMD would report a sharp drop in short interest in its next update due to recent heavy short covering. I went on to argue that the upcoming reduction in short interest would serve to no longer prevent a precipitous decline in the stock price.

The stock price did fall for a time though it has bounced back before falling after its latest earnings report.

AMD Chart

AMD data by YCharts

Today we got a update on AMD's most recent short interest figures and they are staggering!

Shares short increased by over 40 million, by far the biggest increase in the last 12 months. This data is for the two week period up to the 31st July so AMD saw a increase in short interest after its most recent earnings report, which was on July 17th.

In previous articles on AMD I've argued that a high short interest would make for a good short squeeze candidate. This time though I'm bearish. Why?

Two main reasons:

1) AMD's short ratio isn't high, which makes it harder for shorts to be squeezed

2) AMD's revenue growth looks like it will peak soon. The thing most responsible for AMD's recovery over the last year or so has been next generation console sales. These look like they will plateau sooner than previously expected, in Q3 of this year rather than sometime in next year. Add in the fact that AMD will no longer benefit to the same extent from graphics card sales dedicated to crypto currency mining and a weakening competitive position against Intel in PC's, and the fundamental outlook has never seemed so bleak.

Valuation

AMD at its current price looks significantly overvalued. Comparing AMD to NVidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC) on forward earnings indicates that investors are giving a 100% premium to AMD.

AMD PE Ratio (Forward) Chart

AMD PE Ratio (Forward) data by YCharts

A small premium is justified since 2014 earnings for AMD will include the weak first half of the year where console sales are still ramping, but I find it hard to justify more than a 25% premium, which implies a price target of $2.50.

Conclusion

Shorts are betting heavily against AMD and while taking a contrarian stand against them might seem to be a clever idea, this is one time I don't want to go against the crowd.

Source: 40 Million More Reasons To Short AMD