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Why Advanced Micro Devices, Inc. (NASDAQ:AMD) May Now Be a Significant Risk for Chip Cycle Shorts

Advanced Micro Devices, Inc. (NASDAQ:AMD) shares have been one of the most obvious victims of perceived weakness in the chip cycle, with guidance from the company reinforcing the sense established by MKSI and TXN the prior day. The stock dropped in response to the company’s Q4 view to challenge an extremely important zone of technical interest.

What are the real problems for AMD? Speculative inflation of the stock price partially driven by the bitcoin mining bubble, the perception of a durable CPU shortage, and the perception of a persistent bear market in the semi space that got underway over the summer. Given that the stock is now challenging extremely important technical levels (that we will outline below), it’s a good time to revisit these themes.

Advanced Micro Devices, Inc. (NASDAQ:AMD), for a little background, bills itself as a semiconductor company worldwide. It operates in two segments, Computing and Graphics; and Enterprise, Embedded and Semi-Custom.

The company’s products include x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete and integrated graphics processing units (GPUs), and professional GPUs; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles.

It provides x86 microprocessors for desktop PCs under the AMD Ryzen, AMD Ryzen Pro, Threadripper, AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; microprocessors for notebook and 2-in-1s under the AMD Ryzen processors with Radeon Vega GPUs, AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brands; and microprocessors for servers under the AMD EPYC and AMD Opteron brands. It also offers chipsets under the AMD brand; discrete GPUs for desktop and notebook PCs under the AMD Radeon and AMD Embedded Radeon brand; professional graphic products under the AMD Radeon Pro and AMD FirePro brands; and customer-specific solutions based on AMD’s CPU, GPU, and multi-media technologies.

In addition, it provides embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, G-Series, and AMD Embedded Radeon brands; consumer graphics under the AMD Radeon brand; and semi-custom SoC products.

 

Risk to the Upside?

As noted above, the stock just dropped off a cliff following clearly rough Q4 guidance that acted as confirmation that this quarter is going to very challenging for semiconductor names. The move lower has entered a zone on the chart that represents confluence of the 200-day simple moving average, the critical breakout trigger level from the stock’s late July breakout, and the 61.8% Fibonacci retracement level of the stock’s low-high range for 2018.

That zone is roughly $16.90 – $18.30. The stock closed the week at 17.63, right in the middle of that range.

That brings us to reports by XLNX and INTC, both of whom represent clear insight into the chip cycle and the CPU shortage. Both companies reported after AMD, and both had very positive outlooks for Q4, with beat-and-raise announcements.

While we have characterized XLNX as more about the 5G cycle, it is certainly an important point where sentiment around the semi plays is concerned. And INTC gets directly to the heart of the matter for AMD.

In addition, the speculative inflation of AMD share pricing has been wrung out with the decline we have seen in the past two months, as the stock has been cut in half.

All of this suggests we may see a period of rest for shares that tests the patience of new speculative interest.

But the technical zone that we are in now is a very promising price region, especially since we have cultivated a deeply pessimistic view for the stock despite several clues that suggest at least the very reasonable possibility that the Q4 outlook for themes that make up the core AMD value proposition could have significant “risk to the upside”.

Naturally, the trend here over the past two months is down, and we do not advocate trading or investing without appreciation for risk. The current area on the chart, along with the fundamental themes and sentiment in the space, all suggest a probabilistic advantage for long exposure at current levels. But one must appreciate the potential for further downside.

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