Advanced Micro Devices, Inc. (NASDAQ:AMD) short interest has hit a record high. However, shorting AMD stock now isn't a very smart idea.
Shareholders of Sunnyvale, California-based Advanced Micro Devices, Inc. (NASDAQ:AMD) haven't had the best of times this year. After rising by nearly 300% last year, AMD stock has gained just 17.4% year-to-date, underperforming the Nasdaq Composite's (INDEX:COMPX) 21.4% rise. The dismal performance leads us to believe that the market has ignored the multiple positives which have emerged for the company in recent times, which is also reflected by a steady increase in the short interest. All in all, AMD stock might be poised for some serious upside. Here is why.
AMD Stock Now Has Vastly Improved Fundamentals
Yes, you read that right. While most investors would have a hard time believing that AMD, with its loss-making operations, could have strong fundamentals, here is the thing. AMD was a company, given up for dead, only a few quarters ago. As we had covered earlier, AMD stock carried a high bankruptcy risk, not less than a year ago. AMD today is at a totally different level, with improved products and near-GAAP profitability.
AMD returned to non-GAAP profitability in Q2 2017, after many quarters of being deep in the red. Based on the management's commentary from the analyst day 2017, AMD should be GAAP-profitable by the end of the year. Quoting Devinder Kumar, CFO, AMD from the analyst day 2017 presentation, "Last year in 2016, we were operating income profitable. And this we're going to be profitable at the net income level as we finish 2017." Secondly, the company has significantly reduced its debt burden by raising equity funding to pay off its high-interest debt which has led to an increase in the company's Altman Z-score, which is an indicator of bankruptcy. As mentioned in our earlier post on AMD's bankruptcy risk, AMD had an Altman Z-score of -0.89 in September 2016, which indicated a high bankruptcy risk. AMD's Z-score has improved to a more healthy 0.66, which is closer to the threshold of 1.8 used to identify companies in distress. While AMD is still not out of the danger zone, the company is today much better placed than where it was a year-ago. As we had noted in a recent post, AMD seems to be taking a toll on Intel, both in the CPU market as well as the server processor market.
A re-entry into the high-margin CPU segment (Ryzen) coupled with success in the server market should help the company achieve GAAP-profitability and a stronger balance sheet, over the next few quarters.
However, Mr. Market hasn't been impressed by the multiple positives. Positive Wall Street commentary, the longer-term positive impact of the cryptocurrency boom and strong growth at AMD (as observed by IHS Markit) failed to boost investor sentiment as AMD stock continued its volatile range-bound trading activity. However, with gross margins set to expand by nearly 400 bps over the next one year and topline expected to grow at a double-digit rate over the next couple of years, AMD stock might just be ripe for some long-term buying.
The Possibility Of A Short Squeeze
As most followers of AMD stock will be aware, the stock hasn't gone unnoticed by the bears. Every uptick in AMD stock price has been accompanied by bears doubling down on their bets. The result? As of the last reporting cycle, AMD stock was one of the most shorted names on Wall Street, with the short positions accounting for 17.9% of the float or 158.1 million shares. The days to cover was also high at 3 days. Well, the short interest number has only climbed since then.
According to real-time short interest data from S3partners, the bearish bets against AMD have risen to 159 million shares (as of October 3), with the total dollars-at-risk coming in at over $2 billion. These are all-time highs for AMD, both in terms of the number of shares short as well as the dollars-at-risk held by the shorts.
To sum up, given the high short interest, vastly improved fundamentals and the high days to cover, shorting AMD stock is a highly risky play. With AMD stock trading nearly a dollar below the Wall Street consensus price target, shorting AMD stock now isn't a very smart idea.
Any positive trigger to send AMD stock higher could trigger short covering, which could add fuel to any rally from the current price levels. All in all, the $2 Billion Bet Against Advanced Micro Devices, Inc. Could Go Massively Wrong.
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