AMD stock gets overbought and overvalued: is it a buy ahead of earnings?

AMD stock price has gone vertical this year and moved to a record high as the AI boom gained steam. It has soared in the five consecutive weeks, bringing its total market capitalization to over $587 billion. This rally will be in focus as the company publishes its financial results.

AMD stock price has become overbought 

The weekly timeframe chart shows that the AMD share price has been in a strong uptrend this year as companies have continued boosting their AI spending. Just last week, the top four companies in the US announced that they would invest over $725 billion in capital spending this year.

The stock recently crossed the important resistance level at $265, its highest point in October last year and January this year, invalidating the forming double-top pattern. 

It has now remained above all moving averages, a sign that bulls remain in control. The risk, however, is that it may go through mean reversion, a situation where an asset moves back to the historical averages.

The other risk is that the stock has become highly overbought as the Relative Strength Index (RSI) and other oscillators like the Stochastic have moved to the overbought level. 

Therefore, there is a risk that the stock will retreat after its earnings report as the strong numbers have largely been priced in. If this happens, the next key target to watch will be at $265, its highest point in October last year and January this year.

Such a drop would be bullish as it would be a break-and-retest pattern, a common continuation sign in technical analysis.

AMD stock price chart | Source: TradingView 

AMD Will Report Strong Numbers

Analysts are optimistic that the upcoming AMD earnings report will be quite strong, helped by the ongoing AI spending. Its business has become ideal as more companies diversify from NVIDIA, the behemoth with the biggest market share.

Data compiled by Yahoo Finance shows that analysts expect the company's revenue will be $9.9 billion, up by 33% from the same period last year. Its guidance is that its revenue will rise by 38% YoY next quarter to $10.5 billion. AMD has a long track record of doing better than analysts' estimates, meaning that its real numbers will be higher.

The most recent numbers showed that AMD made $10.3 billion in revenue, up by 34% YoY, while its operating margin rose to 17%. Its data center segment recorded a 39% annual growth, while the gaming and embedded grew by 37% and 3%.

Still, a key challenge for the AMD stock price is that its business has become highly overvalued, with its forward price-to-earnings ratio rising to 53, much higher than the sector median of 23. Still, on the positive side, the rule-of-40 multiple shows that it is not all that overvalued as the multiple stands at 50%.

Another potential risk is that it inked a major deal with OpenAI, the parent company of ChatGPT. This deal is risky because OpenAI’s business is slowing amid rising competition with Anthropic. As a result, the company may decide to scale back its spending, which may impact AMD.

The stock is also much higher than the average estimate among analysts. It trades at $360, much higher than the average estimate of $307.