This was the feedback I got when I posted my bearish view on AMD. Yes, there are some good points that my analysis is purely based on the TA and a comparison with what has happened before in a similar chart pattern may not work when the fundamentals have substantially changed or improved in the past 20 years for AMD. It is not the old AMD anymore and it is producing the chips that are highly demanded, meeting the current tech trends, yada, yada, yada..... So I'm totally wrong per the feedback. Well, actually I agree with this feedback in terms of the AMD fundamentals and its transformation. The thing different for my analysis from this friend's view is that fundamentals do not always jive with stock prices when taking into consideration the timeframe and sentiment. I assume it is not news that Buffett has repeated said he does not know what the prices of the stocks he like will be next week, next month or next year. In other words, even the stocks Buffett is buying, which usually mean those with great fundamentals, can go down in prices substantially from time to time. That's really my point for AMD that even though I agree it has become a great stock in terms of fundamentals, its current valuation and sentiment can not support its further price advance in a sustainable fashion. For that, I'm willing to bet for its downtrend, not uptrend.
Although TA is different from FA, it is a great tool to vividly reflect the investors' sentiment towards a stock in real time and therefore indirectly reflects its valuation based on the fundamentals. Even great stocks with fantastic fundamentals can fall sharply if they are in unsustainable valuation territory. This can explain why Buffett is currently holding a huge pile of cash without buying anything right now. Apparently for him, stocks in general are too expensive to buy. That's my view as well for ADM in particular. Let me share a fundamental analysis my friend has shared with me:
But now, at $50, anything other than perfect execution can push the stock lower. The stock traded lower because management provided weaker than expected revenue guidance to go with its earnings results. The market is spooked that the company won't be able to deliver on lofty expectations. Those concerns are probably reasonable. At current valuations, the market is expecting AMD to deliver 15% earnings growth a year going forward. Said differently, AMD has seen ROA (Return on Asset) rise from around 0% historically to 16% in 2019... but at current valuations the company would need ROA to rise to 37%, in order to justify current valuations. It is incredibly rare for a semiconductor firm to have those types of returns for any period of time, let alone being able to keep returns at that level for a sustainable time frame. And worse, AMD didn't actually see ROA rise from 2018 to 2019, like one would want to see to justify high expectations. Its ROA instead fell from 21% to 16%.
Well, AMD declined about 10% in responding to its latest earnings, in line with what I was expecting. But my bearish view for AMD is actually much longer term than just a few weeks time. I think over time AMD has a lot to go to the downside, something similar to what has occurred in the past two similar times as I outlined in my previous blog (see here). But it will certainly not be a one time deal with a straight line down. On the contrary, AMD has some unique way of responding to its earnings and with a lot fluctuations involved. So after some initial profitable betting for its downside, I was actually betting for its short term recovery from its post-earnings shock. As I said, I'm long term bearish on AMD but I'm willing to trade for its short term volatility in either direction. So far so good as I just took my profit from this short trade for its "dead cat bounce", as indeed AMD has nearly recovered all its loss. I'm now in a trade again for its next leg down.
Be clear, while it is so far so good for me, it does not necessarily mean I'm right for sure. I may still be proven wrong for betting its long term bearish trend. Only time can tell!
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