Market Curbs Enthusiasm for AMD

On March 8th I wrote that the disparity between Advanced Micro Devices (AMD) and Intel (INTC) shares (AMD significantly outperforming) is not a new phenomenon, but rarely prolongs for any meaningful amount of time. Oftentimes AMD gets a lead only to see Intel close the gap, usually via massive price cutting. Below is the historical chart I provided, comparing the two computer chip makers.

The majority of feedback I got from that post was from technically-focused investors who were bullish on AMD based on their superior technology. Given I don’t have a computer background, I was basing my opinions on historical evidence, as well as valuation metrics, not product specifications. Over the last four months, the trade I recommended (short AMD, long Intel to play a closing of the gap) has proved very profitable. Intel has dropped less than 10% while AMD is down more than 40%, as this chart shows.

I would be tempted to close out the trade here. Once again steep price cuts from Intel are hurting AMD, as their profit warning late last week indicated. After a huge move in a short amount of time, booking the profit and moving on seems prudent. If the AMD bulls out there are right, and the company will continue to gain market share from Intel, perhaps AMD stock in the low $20’s is a good buy, as it’s much cheaper now than it was in the 40’s earlier this year. I, however, think that call is much tougher than the paired arbitrage trade, so I am going to move to the sidelines.