Advanced Micro Devices (AMD) is a company that has led to a pretty hefty debate. On one side, the bulls argue that with innovative technology at a competitive rate, the company is stealing market share from Intel (INTC) and NVIDIA (NVDA). The bears argue that while AMD has done well so far, the giants will stab back soon enough, and when they do, the stock will tank.
As a result of this heated debate, we’re seeing something interesting in the stock. The bulls are obviously winning with the gains seen over the past couple of years, but we’re also seeing a rise in short interest.
I believe that the short-side opinion, while somewhat valid, is leading to such high short interest that a short squeeze is likely coming. It’s also my opinion that following the short squeeze the stock will continue on steady gains as the company continues to take market cap from the larger players in the market.
The Bearish Argument
The bearish argument with regard to Advanced Micro Devices is a relatively simple one. Some argue that the recent and incredibly strong gains in the value of the stock have to do with hype around the latest and greatest of its innovation that was uncovered at Computex earlier this year. The bears also point to hype surrounding recent Intel node problems as a reason for the spike in value.
Nonetheless, bears argue that investors should not believe the hype. They argue that the hype surrounding new products and Intel issues will soon die down. This combined with the fact that the stock has been wading in overbought territory with a very high RSI for some time now points to the idea AMD is on the brink of a correction.
The Bulls Have A Very Different Argument
The bullish view on Advanced Micro Devices is a very different one, and it will take a bit more time to explain.
Starting With The Intel Security Issue – One key argument in the bullish argument with regard to Advanced Micro Devices has to do with a security issue with Intel nodes that came up back in May. Several reports pointing to vulnerability issues flooded the web. The argument here is a simple one. The bulls argue that Intel’s vulnerabilities point to the idea that AMD provides more secure options, which could lead to spikes in demand.
AMD Is Gaining Ground In The Node Game – When it comes to producing secure nodes, Intel seems to just about always be one step ahead of the competition. That is, until recently. As the company continues to transition to 10nm, it has seen hiccups, like the security issues mentioned above. As fellow Seeking Alpha Contributor, Austin Craig, pointed out, these issues are putting AMD on equal footing, or at least close to equal footing, when it comes to nodes for the first time in history.
Innovative Products Gaining Traction – The bulls also point to the fact that Advanced Micro Devices’ innovation is leading to products that are gaining traction. Cisco (CSCO), Hewlett Packard (HPQ) and other big names are looking to the company’s EYPC server solutions. Not to mention the fact that the company’s innovative projects like Atari VCS and UDOO Bolt have both reached their targets on Kickstarter and are moving to the next phases. All in all, the bulls argue that in the tech world, innovation trumps all and AMD’s innovation is hard to ignore in today’s climate.
Competition – Finally, the bulls look to competition as another reason that AMD investors are in the right place at the right time. At the moment, the biggest competitors to the company are Intel and NVIDIA, and both of these companies are giving AMD bulls something to talk about. We’ve already talked about the vulnerability issues at Intel. On the NVIDIA side of the coin, the company hasn’t come out with any new cards as of late. So, with one large competitor facing vulnerability issues and the other seemingly on sabbatical, the bulls argue that now is the time for AMD to take the industry by storm.
A Short Squeeze In The Making
Regardless of which side of the fence you’re on, there’s one thing that’s hard to ignore here. If things keep playing out as they have for the past several months, a short squeeze is just around the corner.
A short squeeze takes place when short interest is high on a stock that is rising rather than falling. With each gain, shorts take a hit and eventually, they start to back out of their positions. As this takes place, we tend to see mass closure of short positions, leading to a spike in value. While this is never fun for the shorts, those who are long the stock in the center of the short squeeze enjoy the spoils.
In the case of Advanced Micro Devices, a short squeeze is likely on the horizons. At the moment, short interest on AMD is quite high. According to ShortSqueeze.com, As of August 23, 2018, short interest was sitting at 20.21% of the float. That means that more than 1 in 5 shares are being sold short. Over the past month, AMD has risen in value by well over 30%. So, those on the short side of the coin have felt some pain. If these gains continue, chances are that we will see a flood of closing short positions, squeezing the value of the stock higher!
My Bet Is On AMD
I have been very clear from the beginning of this article. I do believe that the bulls have a valid argument. Intel may be having problems, but it is a massive company that has a proven ability to make it over hurdles. NVIDIA may not have released any new cards as of late, but that doesn’t mean that one isn’t coming down the line. Regardless of these risks, I believe that it would be a mistake to discount the potential of Advanced Micro Devices.
The writing is on the wall in the short term. The trend in value is headed up and not likely to stop. At the same time, short interest is incredibly high. So, in the short term, it’s not an unlikely scenario that a short squeeze would take place, producing strong value for those on the bullish side of the coin.
However, even in the long run, it is my view that with Ryzen, EYPC and various other feats of innovation, Advanced Micro Devices is the David that is quickly gaining ground on the Goliaths of the industry. Over the past couple of years, the company hasn’t just proven its ability to innovate, but it has proven its ability to compete. At a time when the competition is either lagging with regard to innovation or dealing with vulnerability concerns, Advanced Micro Devices seems to be poised for growth ahead.
Never Miss The News Again
Do you want real-time, actionable news delivered to your inbox? Join the CNA Finance mailing list below!