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Why AMD Stock Could Surge after Its Q3 Earnings

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Shares of Advanced Micro Devices (AMD) have returned 12.2% over the past year. This shows that the company is underperforming the US semiconductor industry’s gain of 15.8% during the past year.

The company plans to report its third-quarter earnings on October 29 after the market closes. Some options traders are actively betting that AMD stock will rise after the company reports its earnings. So, let’s take a closer look at the company’s third-quarter expectations, valuation, options activity, and technical charts.

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AMD stock: Third-quarter expectations and valuation

Currently, Wall Street expects AMD’s earnings to grow 47.92% in the third quarter to $0.18 per share. Following this trend, analysts forecast that its Q3 revenue could rise to $1.81 billion. This estimate implies a rise of 9.32% on a year-over-year basis. Moreover, analysts expect the company’s EPS to be $0.62 in 2019 and $1.05 in 2020, which implies respective increases of 36.32% and 68.05% year-over-year.

However, the company’s superior potential for growth makes AMD’s valuation levels relatively expensive in comparison to the industry. For instance, the stock is currently trading at a forward price-to-earnings ratio above 60x, while the semiconductor industry has a median PE ratio of 28.43x, based on data compiled from GuruFocus.

Given the company’s demanding valuations, any company-specific negative news or disappointing financial performance could make the stock sensitive to the downside. 

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AMD options analysis

The implied volatility for the options, at a $29.00 strike price that expires on November 1, stands at 64.91%. This number means that investors are expecting an event that could cause modest movement in one direction or the other.

Looking at AMD’s November 1 options, I see a bid/ask for the $29.00 call option of $1.54/$1.55. Also, I see a bid/ask for the $29.00 put option of $2.10/$2.12. Keep in mind that the options strike is closest to the previous AMD closing price of $28.38. We can calculate the expected price move using the mid-prices of these options:

2.11 (29.00 put) + 1.545 (29.00 call) = 3.655/28.38 = 12.8%

As you can see, the options imply that AMD stock could rise or fall by about 13% by the November expirations from the $29.00 strike price using the long straddle strategy. This assessment would place the stock in a trading range of $24.72–$32.07 by the expiration date. Moreover, the calls at the $29.00 strike price outweigh the put options about 2:1 with 2,177 open calls to 1,084 open puts.

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Bullish options bets 

The options, which expire on November 1, saw increased call buying over the past week. According to Barchart.com, the open interest for the $30.00 calls rose by 2,776 contracts to a total of 3,292 open contracts. A buyer of those calls would need the stock to rise to $31.25 by the expiration date, a gain of about 10% from the current price of AMD stock.

Also, the open interest levels for the November $31.00 calls have doubled over the past two weeks. According to Barchart.com, the open contracts rose by 688 contracts to about 1,317. A buyer of the calls would need the stock to rise to $31.92 by the expiration date, a gain of about 12.4% from AMD stock’s current price.

Technical analysis

Looking at the daily chart below, we can see what is going on with Advanced Micro Devices. Currently, the stock has held firm at its technical support around the price of $28.00. It’s also trading 20% off the 52-week high reached in August.

In the near term, AMD stock may rally to the technical resistance level of $30.00. A break of this level would likely send the stock close to its previous high, around $35.00. However, the failure of the price to break above $30.00 would lock the equity in the $28–$30 range. Also, the RSI index is floating close to the oversold area, which may provide additional support in terms of bullish momentum.

Why AMD Stock Could Surge
Source: Think or Swim 

Analysts’ coverage and target price

A lot of Wall Street analysts have upgraded AMD over the last six months. The consensus price target was $31.04, which represents a 9.38% upside. See MarketBeat for a detailed breakdown. According to TipRanks, AMD is a “moderate buy” with an average price target of $33.29, representing a 17.3% upside. 

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