Schaeffer's Trading Floor Blog

Weekly Contrarian: The Worst May Not Be Over for AMD

A few optimists are still hanging on, despite AMD's troubles on and off the charts

by 11/1/2012 10:09 AM
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In a recent Bloomberg Businessweek article entitled AMD Finds the Courage for Another Server Chip Gambit, the author notes that it has been 10 years since Advanced Micro Devices, Inc. (NYSE:AMD) first threw its hat into the server-chip ring. It was then the company introduced Opteron, a direct competitor to sector peer Intel (NASDAQ:INTC ). Although it enjoyed initial success, the author explains that all bets were off once INTC caught up with the technology, and AMD's "glory days were over."

However, the company has recently announced that it will once again be developing a new server chip. This time around, AMD will join forces with semiconductor heavyweight ARM Holdings (NASDAQ:ARMH ), combining the former's design with the latter's architecture to build a smartphone-like chip big enough to handle data center software. The new chip is slated for release in 2014.

The author doesn't wax over AMD's withstanding fundamental issues, noting, "Its server chip business has just about disappeared, and AMD failed to produce any chips capable of participating in the mobile device revolution. AMD just announced yet another round of layoffs, saying it will cut 15 percent of the company's staff as it tries to cope with falling sales." However, by combining its knowledge of server chips with ARMH's microchip technology, AMD is "bringing true server expertise to the ARM realm."

Takeaway

Technically, AMD's time on the charts has been nothing to write home about. In addition to lagging the broader S&P 500 Index (SPX) by 50 percentage points over the past 60 sessions, the stock has shed roughly 62% on a year-to-date basis. More recently, AMD gapped lower following its poorly received fourth-quarter earnings results, and the stock tagged a three-year low in the process. Additionally, the equity continues to stare up at its 10-day moving average -- a trendline that has quickly put the kibosh on rally attempts going back to mid-September.

In recent months, however, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have displayed a preference for bullish bets over bearish. Specifically, the stock's 50-day call/put volume ratio of 2.40 ranks in the 63rd percentile of its annual range, indicating calls have been bought to open over puts at an accelerated clip in recent weeks.

Going forward, this campaign for calls could come back to haunt these optimistic option players. In the front-month series of options, peak call open interest can be found at the November 2.50 strike, where nearly 28,600 calls reside. This heavy accumulation of overhead calls could translate into an options-related speed bump, as these bets begin to unwind.

Meanwhile, four out of 24 analysts still maintain a "buy" or "strong buy" suggestion toward the stock, despite its ongoing fundamental and technical struggles. Plus, the average 12-month price target of $2.85 represents a bold 39% premium to Wednesday's closing price of $2.05. A re-evaluation of ratings from this group of starry-eyed stragglers could apply further selling pressure to AMD's already dismal price action.


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