September 4th, 2018
SELL AMD @ $27.78 (closing long and opening a short)
October 25th, 2018
BUY AMD @ $17.91 (closing the short position)
Post the December crash, we were tempted to play a dead cat bounce but we went long Micron (MU) instead as we felt it offered a better and more compelling long opportunity. Our puts sold on that expired worthless and we were happy to make a nice return.
Source: Wheel Of Fortune Jan 3 alert
We did recently however go back to initiating short positions in AMD and we think it represents a very nice hedge against a market downturn. We explain why below.
The AMD bull slogan" "There's always next year"
To explain the hype, we have to take you back five months when we made the then outrageous prediction that AMD's EPS cycle was peaking. Remember at the time bulls were predicting EPS as high as $2.63 for 2020. Our rationale at the time though was that AMD has never ever defied the broader semiconductor cycle.
Source: AMD: The Only Thing That Matters
Based on the chart above, we were expecting a profit peak and rollover of "EPYC" proportions. We also predicted that revenues would drop to the $1.2 billion quarterly run-rate, a number that seemed rather far fetched to the bulls. We got it right in spades. Although Q4 2018 came in ahead of our expectations, AMD guided for Q1 2019 in our range.
Groupthink has now embraced the reality and pretty much no one believes that AMD can turn this around this year. However there's a lot more optimism for 2020.
Source: Yahoo Finance and author's annotations
AMD bulls though have charged the stock up and it's now back to where it was before the final parabola of the bubble and trading at almost 4X sales.
The logic is that data center will eventually bring about massive growth in AMD's top line. While we are not saying that it cannot happen, we are saying that bulls are massively underestimating the timeline. In the interim, warning signs are still propping up.
South Korean exports are still dropping like a rock
Global semiconductor sales will stay weak until its leading indicator, South Korean exports, finds a bottom. At present there's no sign of that.
South Korea’s exports declined for a third straight month in February, in the latest sign of weaker regional growth as China’s economy slows and amid the fallout from the trade war between Washington and Beijing. The country’s exports fell 11.1 percent last month from a year earlier, according to a preliminary reading from the country’s customs service reported by Reuters. That marked the steepest fall in nearly three years and was ahead of a forecast of 10.8 percent drop from economists polled by Reuters. South Korean exports, which are an early indicator of economic activity in the region, moved into contraction in December after a sharp decline in the volume of goods shipped to China.
Hence even if AMD is due to soar, which we think is extremely unlikely, this is a story for the back half of 2019 at the earliest.
Nvidia's latest outlook and inventories mean that AMD will struggle as well
$1.575 billion of inventories translates into 161 days of inventories. Ycharts is taking a nap on this one, but when it does update, NVDA investors will wake up to another parabola, and not the nice kind.
Fascinatingly, this inventory number was reached after NVDA took a $150 million charge on it. Bloated inventories like this means that gross margins are going to be pressured, and if the channels are stuffed to the gills, as we think, the fun for the bears is just beginning.
Alongside this we still have the secondary market inventories from the cryptocurrency bubble which have yet to be fully absorbed. AMD's gaming revenues and margins will struggle here for sure. So our outlook for AMD is that one of two things will happen.
- AMD will hit its revenue mark and gross margins will falter
- AMD will miss its revenue mark to hold its gross margins.
In either case, AMD bulls will have to reexamine the story and its timeline.
Where to short
With earnings season around the corner and bulls reliving those good old days when AMD stock went up every time someone mentioned Lisa Su, option premiums are being bid up again.
Selling out of the money calls gives investors a rather nice short entry point if AMD bulls rampage through once again and ignore fundamentals post a disappointing earnings result. We did just that.
|1||March 12th, 2019||SELL (to open) AMD 04/26/2019 26 CALL @ $1.05|
Using those calls we are shorting at an effective price of $27.05. Unless our tools are completely broken, we think that AMD will have a hard time guiding for year-over-year sales growth in this environment. We are forecasting $6.4 billion of revenue for the year, and at $27.05, we will be shorting a company that has never made any money over any long-term timeframe, for over 4X sales.
Of course the company does help out the short case itself, as in the absence of any long-term, money-making ventures. It does use the only currency it does have.
AMD is a compelling short case but we have been surprised in the past by the extent to which bulls can have blinders on for the stock. Hence we are shorting with a wider than average margin and look forward to bulls running this right up in our corridor. The short is a hedge on our portfolio and the 4% plus premium compensates us adequately. Given a good price and improving fundamentals, we may get bullish for the second half of the year, but for now we are short.
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Disclosure: I am/we are short AMD, NVDA. 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.