Chipmaker Advanced Micro Devices, Inc. (NASDAQ:AMD) started 2018 with a bang. AMD stock was up more than 30% in January.
But the stock has since given up all of those gains due to the threat of tariffs, falling bitcoin prices, broader struggles in technology, and inflation. Just a few days ago, AMD was more than 30% off its 2018 highs and broke below the all important $10 level.
Those who follow AMD know that the $10 level is one to watch in this stock. Anytime this stock breaks below $10, it usually rebounds with big velocity. That is because the dips to $10 are usually driven by sentiment, not fundamentals. Thus, once sentiment shifts as it almost always does below $10, the stock reverses course and heads sharply higher.
That is why I said buy the dip in AMD stock once it crashed below $10. Since then, AMD has been in rebound mode, and is now flirting with breaking back above $10.
Will this rebound continue? I think so. Here’s why.
I’m sticking by my call that this is a company which can leverage secular tailwinds in the datacenter, AI, AR/VR, and gaming markets to power mid-teens revenue growth over the next several years.
That big growth should allow the company to scale margins to the long-term target of roughly 14%. The combination of that big growth and healthy margin expansion should allow for earnings to rise to roughly $1 per share in 5 years.
At that point, there are two options.
Either AMD gets the average treatment, and is awarded a market-average 16-times forward earnings multiple. In that scenario, you are looking at a $16 price tag for AMD in four years.
Or AMD gets the growth treatment, and is awarded a growth stock-average 19-times forward earnings multiple. In that scenario, you are looking at a $19 price tag for AMD stock in four years.
In four years, then, I realistically see AMD trading somewhere between $16 and $19. Discounting those prices back by 10% per year, we arrive at a present value on AMD of between $11 and $13.
At the midpoint, that is $12. With AMD stock trading right around $10, that means there is another 20% upside to a realistic fair value target.
AMD’s chart also supports the thesis that this rebound will continue towards $12 and maybe even higher.
Over the past year, AMD has traded with a bunch of volatility, bouncing consistently between $10 and $15. Whenever the stock heads toward the upper end of the range, it plummets towards the bottom end of that range. Vice versa, too.
Whenever the stock heads towards the bottom end of that range, it rockets back towards the higher end of the range.
Back in early May 2017, AMD dropped to the $10 level. By June 2017, AMD was trading in the $14 to $15 range.
In early December 2017, AMD again dropped down to the $10 level. By late January 2018, it was a $13 stock.
Now, in April 2018, AMD has yet again dropped back to the $10 level. What is next?
Likely a multi-month rebound towards $12 or higher. The May 2017 drop to $10 turned into a 2 month rally towards $14 and up. The December 2017 drop to $10 turned into a similar 2 month rally towards $13 and up.
The April 2018 drop to $10 will again likely turn into a 2 month rally towards the $12 to $14 range.
Why do these big drops and rises happen right next to each other? Because AMD is a battleground stock where bulls and bears are stuck in a constant tug-of-war.
The bulls won big in 2016 because the stock was dirt cheap down at $2. But in 2017, with AMD trading at $10-plus levels, no one won because the valuation didn’t support that much further upside, while the growth narrative didn’t really warrant a big drop back to $2.
Bottom Line on AMD Stock
Fundamentals and technicals point to this rebound continuing in AMD stock.
I don’t think this is a “buy now and hold forever” type of stock. But at $10, it is a “buy now and sell later” type of stock. That “later” will be when AMD approaches $12.
As of this writing, Luke Lango was long AMD.
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