AMD's Bulls Are Growing Even More Bullish

Summary

AMD's Options traders are betting the stock rises to around by April.

The technical chart indicates the stock may be entering a blow-off top phase.

The stock is priced for perfection with no room for error.

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Just when you thought that Advanced Micro Devices (AMD) couldn't rise anymore, the bulls are growing more bullish. Yes, that's right. The AMD bulls are now betting the stock rises above by as soon as April! What may be even crazier is that the technical chart agrees with that view. That means the stock could still rise by an additional 25% over the next three months.

However, this may be setting up what could be a coming blow-off top for the stock.

By the way, you can track all of my free Seeking Alpha articles on this handy Google Spreadsheet I created about a year ago, along with my success/failure ratio.

Bulls Growing More Bullish

The options for expiration on February 21 saw the open interest for the calls rise by over 14,100 contracts on January 10. The total open interest for these calls is now almost 19,000. Data from Trade Alert shows that the calls traded on January 9 on the ASK, around a price of .75 per contract. It means that for the buyer of the calls to make a profit, the stock would need to rise above .75 by the expiration date. The breakeven price is determined by adding the strike price with the premium paid for the calls.

26750043-15786620673126068.pngAdditionally, the calls for expiration saw their open interest levels rise by around 6,500 contracts, to a total of approximately 16,300 contracts. The data also shows that the call options traded on the ASK for about .80 per contract. It means for the buyer of these calls to earn a profit; the stock would need to rise above .80 by the expiration date, a gain of about 26.1% from the stock's current price of about on January 9.

26750043-1578662295566665.png

Technical Chart Is Bullish Shorter Term

The technical chart seems to suggest that the stock can rise to around over the next few months as well. However, this may be the blow-off top forming on the stock.

The equity has been trending higher since the middle of October when it last reported results. Two technical patterns have formed in the chart. The first pattern is a bullish continuation pattern known as a rising triangle. The pattern suggests the stock rises to around , based on a projection of the current trends. However, the chart also indicates that a bearish reversal pattern has formed, known as bump and run. This pattern would suggest that once the move higher is complete, the stock is likely to reverse and move lower back to the lower trend line.

However, should the stock fail to rise above it could result in a pullback to as low as .

26750043-1578662824135067.png

Priced For Perfection

Even with all the optimism among traders, the stock carries numerous risks. Despite the stock's price trading at levels not seen since the year 2000. The market cap of the company has soared to levels that are at multiples of the company's value in those early years, due to the increasing share count.

26750043-15786629519423962.pngBut more interestingly, is that revenue growth has been relatively flat since 2005. Everyone knows that a stock's performance is tied to future growth, and the stock's significant advance is tied to expectations that the revenue is expected to grow significantly over the next couple of years.

26750043-15786640296065578.pngIt means that the stock is now trading at its highest price to sales ratio ever, on a trailing basis. It is also trading at its highest forward and one-year forward price to sales ratio in recent years.

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Even worse, the stock is the third most expensive stock among the top-25 in the SMH ETF, at 32 times one-year forward earnings, behind Nvidia (NVDA) at 34.2, and Universal Display (OLED) at 39.7. More important is that it trades well above the average of 20.5, and the median of the 17.6.

Simply put, the stock has to have everything go right for it not to see a significant pullback in the future. It means the company needs flawless execution.

Momentum is clearly in AMD's favor, and for now, it seems too hard to fight.

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