With cryptocurrencies currently in the toilet, it shouldn’t come as a surprise that the largest cryptocurrency chipmaker is getting crushed. What doesn’t make sense is just how much it is declining.
Advanced Micro Devices (NASDAQ:AMD) is one of the largest semiconductor companies in the world, with a market cap of $19 billion. It has also seen its stock rise more than almost any other S&P 500 company this year, peaking at more than a 200% rise early last month.
Since that peak, however, it’s been a pretty ugly scene for AMD:
The cause for this fall lies in two major issues for the company. First, AMD has been putting more and more resources into blockchain (including cryptocurrency-focused) graphics processing unit (GPU) sales. With the likes of Bitcoin down more than 66% from its peak last December, this has clearly been a weak market.
Second, AMD has been extremely slow with new product launches. In the fast-moving chip world, that’s a serious crime. The company’s last major launch, for its 14-nm Vega GPU, was more than a year ago. And its game plan for future ones, including the anticipated 7-nm Navi gaming GPUs, has been slow in coming.
Unfortunately for current AMD investors, the market has obsessed over these problems to the point of selling off shares in a panic. But this story isn’t exactly straightforward. And while these issues are troubling for those looking for perfect investments, they are overblown.
For starters, blockchain-specific GPUs only ever made up a high single-digit percentage of AMD sales. So, that alone shouldn’t account for a 42% decline in share price since early September.
As for future launches, the company’s recent earnings announcement sheds some extra light.
After the bell yesterday, AMD announced its third-quarter results. Despite what its share price movement in extended trading yesterday and all-day trading today might indicate, AMD actually beat estimates. Adjusted earnings per share for the quarter came in at 13 cents, compared to the 12-cent expectation.
In fact, this marks the fifth quarter in row of revenue growth and margin expansion. The snag, as many market speculators note following this announcement, was a lower-than-expected guidance.
Obviously, without a set date for its Navi chip launch and guttering crypto-GPU sales, that was an inevitability. But there was another part of this announcement many are passing over. It repeated its projection of launching Navi in the second half of this year, as well as significant increases to semi-custom and data center GPUs. This second is a trend the company expects to continue to drive additional revenues for several quarters.
To be sure, AMD will continue to struggle against competitors Intel (NASDAQ:INTC) and NVIDIA (NASDAQ:NVDA), the latter with its own much-anticipated product launch later this year. But the downside for AMD is overstated. Weaker overall GPU sales forecasts are now beginning to be baked into these companies’ share prices. Once a floor is hit, a bounce back could be in the works. So, how should you play it?
A Strategy to Buy AMD For an Even Larger Discount
While tech stock investors can be quite fickle, as price movement in the semiconductor industry has shown, tech stock option investors are more predictable.
You see, when a company like this one — with a huge pool of investors and Wall Street Journal front page size — sees this kind of price volatility, you can bet that option premiums go way up. And that’s exactly the case for AMD just prior to, and now just following, its earnings report.
In such an environment, there’s a strategy you can use to take advantage.
If shares do stabilize from here — currently at about $19.25 — they might be an attractive “buy low, sell high” opportunity. After all, AMD isn’t going to disappear from one slightly weaker quarter. After all, AMD controls a double-digit market share competing with the likes of Intel. It’s not going anywhere.
But instead of hoping that $19 per share is a perfect bottom price, why not bake in a little extra protection for yourself?
If you sell a December 21 $18 put, you would receive a $1.58 premium. That’s a sizable premium, but not unexpected considering the recent volatility in share price. By using a cash-secured put strategy, you can use that to your advantage.
A cash-secured put is a trade that lets you 1.) set your own entry price for a stock you would like to purchase and 2.) collect an upfront premium no matter if the option itself is ever exercised. Here’s how it works.
When you sell a put, you are giving the put buyer the chance to sell shares of the underlying stock to you at the strike price at any time before expiration. In this case, that means you might have to buy shares of AMD for $18. Right now, they are trading at $19.25. So, already you would be getting a $1.25 per share discount from today’s price.
More importantly, that’s not where the discount ends. You see, by selling this particular strike, you would receive $1.58 per share, or $158 per contract (100 shares per contract). That means your actual investment would cost you $16.42 per share ($18 – $1.58). That’s a nearly 14% discount to today’s price.
Another way to look at it would be 8.8% initial return on the $1,800 you would be spending on your 100 shares of AMD ($158 premium on $1,800 invested in AMD shares).
There is a downside to this strategy if you are looking for short-term quick-hitting gains. Your broker will require you to put up $1,800 to enter this trade (hence, “cash-secured), unless you do so on margin. But if you were optimistic about the longer-term outlook of AMD, that’s still cheaper than the $1,925 those same 100 shares would cost you if you simply purchased them today. And that $158 premium is yours no matter what happens.
Finally, if shares bounce back sooner than December, you can always buy back your put for much less than you received. That would let you pocket the difference without even buying shares.
So, for those looking to get into AMD after this decline in price, this is both a great way to buy at a discount and receive income to do it. That, or cashing in a nice short-term income check, without even buying the stock at all.
— The Option Specialist