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Is AMD Stock In A Bubble, And Is It Popping?

By the end of November, AMD stock had produced the highest six-month gains of the past few years. Has the party gone too far, and is it about to end abruptly?

An incredible year of returns for AMD stock  (AMD) - Get Advanced Micro Devices, Inc. Report is coming to an end — but with a sputter. While shares remain up roughly 50% for the year so far, the performance in December has been dismal: -12% against the S&P 500’s +3%.

Figure 1: AMD Ryzen processor.

Figure 1: AMD Ryzen processor.

Considering the impressive rally of 2020 and 2021, could AMD stock have climbed well into overbought territory? If so, might the loss of momentum in the last few days of the year lead to a popping of the bubble? Wall Street Memes explores the topic today.

(Read more from Wall Street Memes: Why Betting Against AMC Stock Is Still a Bad Idea)

Has popularity formed a bubble?

First, let me be clear that AMD barely meets the criteria of “meme stock”. The semiconductor maker has strong business fundamentals, as evidenced by (1) dizzying revenue growth of over 50% in the past five quarters, (2) consensus earnings growth of over 20% per year through 2024 at least, and (3) a robust, nearly debt-free balance sheet.

But AMD shares one key trait with the traditional meme stocks, including GameStop  (GME) - Get GameStop Corp. Class A Report and AMC  (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report: popularity among retail investors. As the table below shows, AMD stock has been the sixth most discussed on Reddit — in fact, more so than GME and AMC lately.

Figure 2: Trending stocks on Reddit on December 16.

Figure 2: Trending stocks on Reddit on December 16.

Popularity does not always have to be a good thing, however. Maybe driven by buzz and enthusiasm, AMD stock may have gone a bit too far, a bit too fast.

The chart below shows the rolling six-month returns of AMD stock over the past three years. In late November, shares accumulated six-month gains of nearly 107%. This was the first time during the entire period that this figure topped 100%.

Figure 3: AMD stock rolling 6-month returns.

Figure 3: AMD stock rolling 6-month returns.

The only other time in recent memory that such a strong rally happened was in late Q3 and early days of Q4, in 2018. What followed was a painful decline of 30% in AMD price between mid-October and the end of December of that year.

Other considerations: short interest

Bears seem to have taken notice. According to Nasdaq, short interest spiked from only around 62 million shares at the end of Q3 to 75 million around a month ago, before pulling back a bit in early December. See chart below.

Among the best-known chip makers, including NVIDIA  (NVDA) - Get NVIDIA Corporation Report and Intel  (INTC) - Get Intel Corporation Report, AMD is by far the one with the highest short interest ratio: about 6% vs. its peers’ 1% to 2%, on average. While these numbers suggest a ramp up in bearishness, a short squeeze is unlikely, considering AMD’s modest 1.2 day to cover that is lower than the 2021 average of around 1.8.

Figure 4: AMD short interest, in millions of shares.

Figure 4: AMD short interest, in millions of shares.

So, is it a bubble?

Back to the original questions of the article: (1) is AMD stock in a bubble, and (2) is it about to pop? The answers are not obvious. But I believe that the “B” word should not be used lightly. It may apply best to companies whose business fundamentals are substantially worse that their inflated stock prices may suggest, not so much to AMD.

That said, I see enough evidence that AMD stock may have front-loaded too much of its future gains. This was probably triggered by the COVID-19 crisis that caused the company’s financial results to significantly improve in 2020 and 2021.

Given the dizzying rally in AMD in the second half of this year and a current-year P/E of 55 times that looks a bit bloated, I would be careful owning too much AMD stock today.

(Read more from Wall Street Memes: Here Is Why BlackBerry’s Earnings May Boost The Stock)

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)