If you’re a current Advanced Micro Devices investor, Monday night’s earnings warning must have felt like your motherboard crashed.
Chip maker AMD announced that it expects second-quarter revenue to drop by 11 percent from the prior quarter. The usual suspects, Europe and China are blamed for soft sales.
I suspect, based on sales of Dell and Hewlett-Packard, that Apple’s growing market dominance is now touching AMD.
Based on my experience with gap-downs following earnings warnings similar to AMD’s, the odds favor greater downside, with Wednesday or Thursday marking the short-term low. It’s not quite time to wish for a price above the closing before earnings of $5.50, but AMD does have strong support near $4.50.
Friday or early next week will likely find bargain hunters picking up shares cheap to flip over. If Thursday appears to be closing below Wednesday’s low, I may join with the bargain hunters for a quick hit-and-run weekend carryover.
Bargain hunters and short-sellers covering positions could push the price up about 50 percent in relation to the gap-down price. I expect short-term resistance near $5.55. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $5.25 a share Tuesday, but also be prepared for a closing under the opening price, and more than a 20 percent chance of a close under $5.
If you are looking for the drop to signal a buying opportunity, you are likely going to find the end of the day Wednesday or Thursday better than Tuesday. There is no hurry buying the dip with AMD. Stocks dumped as a result of profit warnings usually take a full two good earnings quarters to recover. Take your time and do your homework before allocating capital here. Look for the second break above $6 as the one that "sticks."
Want to see a classic miss earnings result a few weeks after the fact? Take a look at Dell or HP. Dell disappointed and traded from $15 down to the current $12.40. Also, take close note of the next few days after earnings. This is a classic pattern I see often, and you can, too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Dell is now resistance.
HP and Dell sell Intel and AMD products. Apple, on the other hand, moved to Intel chips a few years ago and the impact on Intel’s stock says it all. Normally, one would expect a falling tide to lower all boats, but in the case of AMD and Intel, the tide isn’t the biggest influence.
As long as Intel is able to move into other product lines while consumed by every computer maker, it is expected to have the edge in stability of sales.
Apple continues to execute flawlessly, while others try to maintain their balance. At the time of writing, shares in Apple and Intel are higher.
We have our answer to why AMD’s report doesn’t compute. Apple’s iPad and tablets are eating AMD’s lunch. After Apple produced one of the greatest earnings beat in the history of technology, it doesn’t take a leap of understanding to figure out someone was going to end up short. Intel doesn’t have all of Apple’s products, but any share of Apple is better than none.
Last quarter, Apple’s revenue was just short of $40 billion, an increase of 59 percent over the same period last year. The biggest product is the iPhone, but Apple is firing on all cylinders. Apple also had record computer sales in the quarter, selling four million Macs. This represents an increase of 7 percent over the same quarter last year.
If a worldwide 2 percent computer growth is expected and Apple is growing 7 percent, you can see a problem for AMD rather quickly. Apple’s growth feeds directly into Intel.
What’s the best play with AMD? There should be a very attractive trade coming up Wednesday and/or Thursday. Near the end of the day, if still trading lower, sell out-of-the-money puts . Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom.
It’s not one to get greedy with, hold on for a few days and as the implied volatility falls (hopefully with a nice dead cat bounce) exit out with a quick hit and run for profits. Otherwise for longer-term investors, the best play is to wait until we are closer to the next earnings release for an entry.
—By TheStreet.com Contributor Robert Weinstein
Additional News: Chip Maker AMD Cuts Revenue Forecast; Shares Fall
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TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. At the time of publication, Robert Weinstein did not hold a position in any stock mentioned.