What the Big Short Interest in AMD Stock Means for the Shares
Excluding Tesla (NASDAQ:TSLA), chipmaker Advanced Micro Devices (NASDAQ:AMD) is arguably one of the most hotly debated stocks on Wall Street. On one side, you have the AMD stock bulls who believe AMD is in the early stages of stealing significant market share from Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) in big-time growth verticals, and that as the company gains more market share, AMD will soar.
Source: Shutterstock
On the other side, you have the bear camp. Bears believe that AMD’s current rate of market share expansion is unsustainable. Eventually, Intel and Nvidia will punch back, and when they do, AMD stock will drop, according to the bulls.
The bulls have been right thus far. In 2016, this was a $2 stock. In 2017, it was a $10 stock. Now, AMD stock trades around $20.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
But the bears aren’t backing down. If anything, they are doubling down. According to YCharts, short interest in AMD (which means the percent of the stock float that is short) is now at 23%. That is up from largely sub-20% levels throughout 2016-17, and it’s nearing a decade high.
What does all that mean?
There are two implications. One, AMD stock could rally in the near-term from a potential short squeeze as its quarterly numbers should continue to be quite good. Secondly, AMD could fumble 12 to 18 months down the road when Intel starts punching back.
AMD Stock And the Short Squeeze
Short interest in AMD stock is at nearly 25%. It hasn’t been this high since mid-2015. At the time, AMD stock was trading around $2, and a lot of bears were betting that it would go bankrupt.
That didn’t happen. Instead, AMD’s numbers got better, and all that short interest served as rocket fuel for a huge rally. As the numbers improved, the shorts were rushing to cover, causing a massive short squeeze. Over the next year, short interest dropped from 25% to 12%, and AMD stock rose to $7.
A similar dynamic could play out here and now.
At the moment, AMD is stealing significant market share from Nvidia and Intel. On the Intel front, the market share gains are quite prominent. AMD had less than a 1% share of the server market last year. This year, the company is projected to control somewhere around 7%-9% of the server market. By next year, even Intel is admitting that AMD could have a 15%-20% share of the server market .
AMD’s market share expansion won’t end any time soon. Intel isn’t slated to launch its next-generation chips until late in 2019. Thus, AMD should be able to keep growing its market share and continuing to post above-consensus quarterly numbers for the next several months.
This isn’t the first time this has happened. Back in 2004-05, AMD’s share of the server market was rising rapidly at Intel’s expense, and AMD stock went on a huge run.
Looking at the big picture, I think the AMD narrative will remain largely positive over the next six to twelve months. During that stretch, the company’s quarterly numbers will be good, and impatient shorts will rush to cover. The net result should be higher AMD stock prices.
Watch Out for the Long-Term
The shorts aren’t entirely wrong here. They are just too early.
There is no doubt that Intel will punch back. It is the 200-pound gorilla in this market, with a 90%-plus share of the server market. They simply aren’t going to shrivel up and let AMD walk all over them forever.
When Intel punches back, AMD stock will react. The competitive environment will become more intense, and the era of market share gains and consistent double-beat quarters will come to a close. Investors will start to question the huge premium they are paying for AMD stock, and some money will flow back into INTC stock.
None of this will happen until late 2019. Until then, AMD stock looks good.
But when Intel does punch back in late 2019, AMD stock will take a hit. As such, I think AMD stock is presently a case of near-term gain, long-term pain.
Bottom Line on AMD Stock
The huge short interest in AMD stock gives the shares a ton of firepower over the next 12 months as the company’s numbers and narrative remain robust.
But in late 2019, Intel will punch back, and AMD stock will likely suffer as a result. Thus, owning AMD stock now and selling it before late 2019 seems like the right strategy.
As of this writing, Luke Lango was long AMD, INTC, and NVDA.
More From InvestorPlace
The post What the Big Short Interest in AMD Stock Means for the Shares appeared first on InvestorPlace.
