You Can Still Trust AMD Stock in the Nearer Term But Don’t Ignore Risks

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After multiple years of robust returns, you’d initially think that Advanced Micro Devices (NASDAQ:AMD) stock is due for a correction. But add in some context and you’ll likely arrive at a different conclusion. Primarily, the deadly combo of the company’s remarkable innovations, combined with rival Intel’s (NASDAQ:INTC) comically tragic missteps have added credibility to the rise of AMD stock. Further, two obvious catalysts bode well for Advanced Micro.

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First, the bullishness in cryptocurrencies is an underappreciated factor for AMD stock. Admittedly, the recent volatility in the sector doesn’t give me the warm and fuzzies. However, it’s important to realize that virtual currencies are holding up well near their all-time highs. As well, the wildness in the day-to-day swings isn’t unusual for longtime sector participants.

Therefore, this signals further mainstream adoption of cryptos, which is a net positive for AMD stock due to the underlying company’s graphics processors, which form the engines of crypto mining. As I explained recently, demand for mining increases as virtual currency prices increase. Moreover, the integration of renewable energy sources could potentially make mining cost-friendlier, and thereby more attractive.

AMD Stock Rides Gaming Surge

But taking this sector aside, AMD stock can benefit from its core market — video games. In the pre-pandemic years, gaming was only rocketing to new plateaus as advancing technologies bridged the gap between fantasy and reality. However, the novel coronavirus outbreak took this demand profile into another dimension.

With government agencies imposing shelter-in-place orders, millions of Americans were left working from home. That was both a blessing and a curse as employees had more time to themselves but lost ways in which to exercise it. Fortunately, video games filled the entertainment gap, providing hours of contactless fun.

Better yet, you could see the dramatically positive impact that Covid-19 had on gaming-related sales. Naturally, this was a huge sentiment boost for AMD stock. At the same time, is this narrative overplayed?

Future Upside for AMD Stock May Be Limited

According to a technical assessment by Investors.com, AMD stock charted a bullish technical pattern, signaling further optimism ahead despite shares being up nearly 87% year-to-date. Plus, you have the fundamental factors of growing demand in the crypto and gaming spaces — along with other revenue channels — that should support Advanced Micro.

At the present juncture, I’m not seeing any signs that AMD stock is going to plummet. Further, as we become increasingly dependent on cloud computing and other connectivity solutions, AMD should avail itself to multiple opportunities, competing directly with established tech giants. However, I question the likelihood that we’ll see the ridiculous gains of prior years.

Mainly, I say this because of the emerging relationship between the technology sector and the benchmark S&P 500 index. From 1985 through 2002, the correlation coefficient between the NYSE Arca Tech 100 index (NYSE:^PSE) and the S&P 500 measured 74% in terms of annual average performance. Though this direct relationship was strong, it wasn’t a perfect correlation because tech enjoyed very healthy gains as society transitioned from analog operations to digital.

But from 2003 onward, the relationship between the tech sector and the broader market changed considerably. Now, the correlation coefficient is 87% between the Arca Tech 100 and the S&P 500. Further, the correlation since 2011 is 94%. Essentially, the two indexes are tightening.

Fundamentally, this makes sense because society has become digitalized. But that also means there are fewer paradigm-shifting innovations on tap, as in, there’s a huge difference between a fax machine and email. But the leap from email to a communication platform such as that offered by Slack Technologies (NYSE:WORK) is not as great.

That’s not to say that AMD stock doesn’t have more gains ahead, because it probably does. Rather, the upside probably won’t be as robust as before.

K-Shaped Risk Factor to Consider

No matter what you decide on with Advanced Micro, there is one last point I believe is worthy to consider for any tech-related investment and that’s the concept of the K-shaped economic recovery. The basic idea is that the top 20% or so of society will rise, while the bottom 80% will crumble.

Seemingly, many pundits believe this is a viable way forward. I have my doubts.

Mathematically, if the correlation between the tech sector and the benchmark index is tightening, this also implies that the fate between the two have become more intertwined. That is, if one index goes down, the other could go down with it. This gives new meaning to the hackneyed phrase, we’re in this together.

And that’s the issue — I do believe we’re in this together. This shouldn’t dissuade you from AMD stock but the warning is worth keeping mind. The path ahead isn’t as easy as some have indicated.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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