All things considered, semiconductor giant Advanced Micro Devices (NASDAQ:AMD) appears to have weathered the storm caused by China’s DeepSeek. Seemingly out of nowhere, the Chinese algorithm disrupted the artificial-intelligence paradigm, sparking a sharp correction in several tech enterprises. AMD stock wasn’t immune to the fallout but relatively speaking, it managed to stay on its feet.
Still, Advanced Micro isn’t out of the woods just yet. Moving forward, the financial concerns will center on valuation. Presently, AMD stock trades hands at 25.2X forward earnings and 7.9X trailing-12-month (TTM) sales, which while elevated are discounted relative to year-ago metrics of nearly 54X and 13X, respectively.
To be sure, analysts are anticipating more than 25% growth in fiscal 2025, with consensus sales aiming for $29.86 billion. Further, earnings per share could hit $4.95, up 49.1% from projected 2024 EPS of $3.32. The question is, how realistic are these figures given the potential DeepSeek threat?
With Chinese open-source AI models competing with American (and western) models on capabilities and cost-efficiencies, it may not be long before demand for hardware accelerators — a key business under Advanced Micro — shifts away from AMD’s coffers and toward the competition.
That risk may not be fully priced in yet, making AMD stock a surprisingly treacherous idea.
Given the natural desire to pick up market discounts, it’s easy to fall into the trap of simply buying AMD stock at the sight of crimson ink. However, it’s better to apply a more strategic approach, especially in the backdrop of a fundamental threat like DeepSeek.
Using data from the past five years, a purely stochastic view of AMD stock — that is, devoid of any other context aside from the temporal — reveals a neutral to negative bias. On a week-to-week basis, the chances that a position entered at the beginning of the period will be positive at the end of it stands at 53.41%. However, over a four-week basis, these long odds decline to slightly worse than a coin toss at 49.81%.
To be sure, human emotions run the market — and there can be accelerated responses to extreme examples of fear or greed. Modeling for Monday’s fallout as if it occurred last week, AMD stock would have lost about 6%. Typically, whenever AMD loses between 5% to 10% in a one-week period, there’s only a 44.74% chance that by the end of the fourth subsequent week, the security will be in the black.
Mathematically, the bears have the edge in terms of probabilistic risk to the tune of a 55.26% success ratio. However, the advantage isn’t materially great, which is why a directional wager doesn’t appear prudent. Instead, advanced investors may want to consider buying a long hedge against future volatility.
For the most advanced trader, buying a long iron condor could be attractive here given the directional ambiguity. However, for those looking for a more straightforward hedge, a long strangle might be effective. This strategy involves buying a call option and buying a put option at a lower strike price (for the same expiration date).
Based on the market intelligence above, AMD stock under positive scenarios is aiming for a median return of 10.71% over the next four weeks. Under negative scenarios, the median loss sits at 6.36%. However, with the uncertainty over next week’s earnings report, AMD could be subject to downside risk.
With that in mind, one idea to consider is the 127C/112P long strangle for the options chain expiring Feb. 21. This transaction involves buying the $127 call and also buying the $112 put, which covers downside risk but could also potentially benefit from a strong move upward.