Is it a good time to buy AMD (AMD)? Well "yes" and "no." "Yes" in the fact the company is doing very well with its CPU efforts and is well set to improve in GPU via next-generation GPU code names Navi. Yet, the overall market is experiencing great uncertainty via rising interest rates, an energy war with Iran, trade wars with China, along with the recent arrest of a Chinese CFO. Mr. Market does not like uncertainty. In this article, we will review market psychology and how AMD will experience a pop in January. Lastly we will show you how to be paid to own this stock.
Part of being a trader is being unemotional while realizing that investors or speculators trade on emotion. Logic cannot define it. You can logically state this stock is overvalued or undervalued and it matters not. The herd has spoken and will push the stock up to unrealistic values or will sell the stock off to depressingly deep value levels. This cartoon captures it perfectly:
The Cycle of Trading
Life and people move in cycles. Trading and investing is no different. The first step to evaluating any stock is realizing what part of the cycle that stock is in (along with the market in general).
Chart #1 above depicts pretty accurately the flow of emotions at work on investors. At any given time, the herd will be at some point on the chart. However, Chart #2 below gives a solid illustration of how things go south in a hurry when the masses panic.
Chart #2 Per Chart #1, it's likely the majority of AMD investors are somewhere between hope and optimism. Obviously, AMD could continue to wobble (and/or the market could continue to shutter around). Yet, I'm willing to bet on AMD's long-term roadmap. Let's look to the future and see where that road may lead us.
By popular demand, a reader requested I write about the warrants issued by AMD to Mubadala. It's rather simple. AMD granted Mubadala 75 million shares at $5.98 per share via warrants. These warrants expire on Feb. 29, 2020 (486 days from Oct. 31, 2018). Thus, AMD will receive $448.5 million before the warrants expire once Mubadala uses them.
Much Ado About Nothing
Much gobbledygook has been written about AMD and the debt they hold. While not worth exploring, I will scratch upon it just because some web pages relish in bring it up over and over again (and again). The premise that AMD will not be able to pay off its debt load is fictitious at best. Look at the current debt load (far right column) and the due dates: Then factor in the above warrant payment on top of the most excellent paying down of the debt.
AMD will simply continue to pay off the 2019 debt while grinding away at the 2022 debt. The 2024 debt is less of a concern for traders since it's over five years out. The 2026 debt is convertible debt that will convert into stock. Thus the short-term debt load is of no concern.
The CPU house is in order. Ryzen 2 is fast approaching and should launch around March-April (give or take). EPYC continues to ramp and supposedly will be at mid-single digits in market share in Q4. ROME will launch around the time frame of Ryzen 2.
Nvidia (NASDAQ:NVDA) recently announced some spectacularly bad growth projections which have impacted Nvidia stock. The problem going forward is that they are sitting on a horde of unsold inventory - along with add-in board makers (AIB). If they release the successor to the Nvidia 1060 line, then they alienate the AIBs. If they do not (and it looks like they are not) then they have to wait for the old inventory to sell off or take a write off for hundreds of millions. Neither situation is optimal as the new 2060 is gathering dust by waiting. Meanwhile, the competition is not just resting idle.
AMD just released the 590 line which does add some flare to the line up, but honestly I do not find it very compelling given its price. Maybe that will drop with time. The 580s have been dropping like a rock price wise. This impacts AMD margins while putting pressure on Nvidia.
Many rumors are circulating about what AMD's next generation GPU Navi will be and its target range. Some think it will replace the aging AMD 580 line while others reckon it will fight at the upper high end. Maybe it's both (depending on versions), but at this point Nvidia is only competing against itself in the high end. Navi will close the gap in the GPU realm. Nvidia will surely have a 7nm solution in the pipeline though. However AMD going from no high-end presence to something in the high-end presence will eventually impact Nvidia.
Winter Hype Is Coming
Right now is a time for caution given how wobbly the stock market is due to geopolitics. However we can be paid to buy AMD stock. We are selling $19.50 December 21st puts against AMD. If AMD keeps going down we will be paid .86 per contract (4.4% for two weeks) and will enter the stock at what we consider to be a good entry point of $19.50. If AMD rises the puts will decline in value which is good for us while our long-term calls appreciate.
We are holding AMD common and long term calls for CES hype. When AMD CEO Lisa Su talks at CES come mid January massive hype is going to be unleashed around datacenter GPUs and Ryzen 2 CPU news. With that I leave you with Merry Christmas.
Disclosure: I am/we are long AMD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We own AMD common stock.
We also own AMD long term options.
We have sold covered calls against a portion of our AMD holdings.
We have sold puts against AMD at a $19.50 strike for December.