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Advanced Micro Devices, Inc. (AMD) Stock Is a Strong Pullback Buy

Richard Saintvilus

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investors who have waited patiently for a better entry point in Advanced Micro Devices, Inc. (NASDAQ:AMD) stock have gotten their chance. AMD stock has been crushed over the past couple of weeks, falling nearly 25% until finally getting a bounce Monday that continued softly on Tuesday.

Buy Advanced Micro Devices, Inc. (AMD) Stock On This Pullback

Source: Matthew Rutledge via Flickr

The impetus for the most recent selloff? The semiconductor reported second-quarter earnings that not only beat on the top and bottom lines, but included a strong outlook.

Doesn’t seem right, does it?

Is Advanced Micro Just a Cryptocurrency Play?

AMD stock closed Friday at $12.23, losing almost 7% last week. Part of that you can hang on the overall market selloff, though shares also were crushed after Barclays analyst Blayne Curtis reiterated Advanced Micro Devices at “Underweight”  and slashed his price target to $9, representing 26% downside from Friday’s close.

In a bearish note last Tuesday, Curtis ridiculed what he perceives to be bubble of sorts in cryptocurrency prices — Ethereum in particular, which he notes will pressure not only AMD’s revenue once the inevitable burst occurs, but also hurt pricing power and profit margins.

Curtis is not the only bearish analyst warning about cryptocurrency. Citing similar concerns, Toshiya Hari of Goldman Sachs rated AMD a “Sell” back in June, offering up a $10.60 price target, which represents about 17% downside from current prices.

In both cases, the analysts are essentially betting against Advanced Micro’s own third-quarter and fiscal-year guidance, which may bet too much on cryptocurrency. AMD calls for Q3 revenue to rise 20% to 26% sequentially, which (at the midpoint) calls for $1.5 billion, representing 15% year-over-year growth, versus consensus estimates of $1.39 billion.

In terms of the effect from cryptocurrency, CEO Lisa Su is placing her company’s future solely on something that is unsustainable. At the same time, as with Nvidia Corporation (NASDAQ:NVDA), she’s not going to dismiss the possibilities, either. On the conference call with analysts following Q2 results, Su responded to a question about her third-quarter guidance with cautious optimism.

“When you look at our typical seasonality, as you said, we tend to be down in Q4. Now, semi-custom [GPU for cryptocurrency mining] is still a large, large piece of our business, and semi-custom will peak in Q3 and it will come down in Q4,” Su said. “I also think that we want to be cognizant of the fact that some of the graphics demand that we see might be temporal.”

In other words, Su understands AMD’s business and is not celebrating cryptocurrency gains to the extent that analysts believe the company’s guidance suggests. In particular to cryptocurrency mining, Su added, “So we’re not counting on that staying through the full year. We’ll see what happens. Frankly, I think we’ll see what happens with the whole mining stuff.”

The Real Reason Behind the Pressure

Investors were looking for confirmation that Advanced Micro Devices could grow into the enormous gains of almost 300% that AMD stock has made over the past year.

In many respects, the Sunnyvale, Calif.-based company — as evidenced by its guidance and Q2 report — responded. But the stock couldn’t overcome profit-taking from one of the company’s largest shareholders.

According to ReutersMubadala Investment Co. — a United Arab Emirates-based firm and one of the company’s board members — sold 40 million AMD shares on Aug. 4, netting some $530 million in proceeds. That sale amounted to 3.9% stake in the company.

As to the reason for the sale, which came 10 days after AMD crushed Q2 estimates, Mubadala spokesman Brian Lott told Reuters:

“This is in line with Mubadala’s strategy as a financial investor with a long-term perspective, to optimize our shareholding in certain assets and monetize them at the appropriate time.”

This comes on the heels of the another sale in March when Mubadala netted $613 million, selling 45 million shares of AMD stock. Yet despite this selling, Mubadala remains AMD’s largest shareholder with a nearly 13% in a combination of 57 million common shares and 75 million warrants. Lott added, “We continue to believe strongly in AMD and are confident in the management team’s ability to execute against its technology and product road maps.”

In other words, Mubadala is acting in its best interest, but the firm is still fully invested.

Bottom Line for AMD Stock

Fundamentally, Advanced Micro Devices — which grew revenues 18.4% year-over-year and beat on the bottom line by 2 cents — continues to execute on its stated objectives. Notably, AMD continue to realize higher average selling prices (ASP) in both the Client segment and GPUs.

And with the recent launch x86 server CPU, combined with its collaboration with Microsoft Corporation (NASDAQ:MSFT), now is the time to strike.

With gains coming in from its major revenue segments, Advanced MIcro remains on pace for a strong finish in 2017. As such, AMD stock should reach $16 per share by the end of the year, yielding 25% returns from current levels.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.

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