Today, there is heavy and unusual trading volume in put and call options for Advanced Micro Devices (AMD). This could be due to the recent Saudi buy commitment, and highlights the underlying value of AMD stock.

AMD stock is up 5% in midday trading to $119.02. This is well up from its recent low of $78.21 on April 8, but still down from a 6-month peak of $143.99 on Dec. 4, 2024.

Today, the Barchart Unusual Stock Options Activity Report shows the unusual volume in AMD options. A synopsis can be seen in the table below.

For example, this shows that over 29,000 call options have traded at the $123.00 strike price for expiration on May 16, this Friday. That volume is 36 times the prior number of outstanding contracts at the $123.00 strike price.

This is out-of-the-money (OTM) since the exercise price is over $5 higher than today's trading price. Moreover, the breakeven point, including the $0.69 premium, is $123.69, or 4.9% higher than today's price

As a result, the buyers of these calls must feel very strongly that the stock could rise over 5% in the next two days. This could be due to news at the Saudi Arabia investment conference that AMD will win a contract to support 500 megawatts of AI compute capacity in the Saudi Kingdom. AMD said the Saudi AI enterprise company HUMAIN, will spend $10 billion with AMD to build out this project.

It could also be a reaction to the company's strong results from its Q1 earnings release last week and today's announcement of a new $6 billion share repurchase authorization.

Strong Earnings and Cash Flow

Advanced Micro Devices reported that its revenue was up 36% Y/Y at $7.438 billion, although this was down 2.87% from the Q4 revenue of $7.658 billion.

More importantly, its free cash flow (FCF) remained strong. For example, AMD generated $727 million in FCF in Q1, representing almost 10% of its sales (9.77%). AMD provided the table below, which shows how that compares to other quarters:

The bottom line is that despite higher capex, its FCF margin (i.e., FCF /revenue), although lower than in Q4, was still significantly higher than a year ago. That implies the company is still squeezing out positive cash flow from its operations even after increasing its capex spending.

Moreover, it implies the stock could be worth significantly more.

Target Prices for AMD Stock

For example, management projected that Q2 revenue will be $7.4 billion, plus or minus $300 million. In other words, it could be flat with Q1, but implies a run revenue rate of $29.72 billion for the year (i.e., $7.43b x 4). (By the way, the $10 billion Saudi deal, if it comes in over 3 years, could bring an additional 10% to the company's growth rate.)

In addition, assuming a 10% FCF rate, its projected FCF could be almost $3 billion (i.e., $2.972 billion).

Moreover, analysts project 2025 sales of $31.06 billion, i.e., +4.5% higher than the run rate projection. In addition, 2026 projections are for $37.41 billion. That means that, sometime in the next year, AMD will be on a run rate revenue of about $34.235 billion for the next 12 months (NTM).

So, applying a 10% FCF margin to this NTM revenue forecast:

  $34.235 b x 10% = $3.4235 billion NTM FCF

As a result, this is 15% higher than the $2.97 billion run rate FCF rate. This can be used to set a price target for AMD stock.

For example, using a 1.5% FCF yield metric, here is what the stock's market value could be worth:

  $3.424 billion / 0.015 = $228.27 billion target mkt cap

This is +18.6% higher than AMD's market cap today of $192.52 billion. In other words, AMD stock could be worth 18.6% more than $119.02 today, or about $141 per share.

That is higher than what other analysts presently have as the stock's target price. For example, Yahoo! Finance reports that the average of 49 analysts is $126.29, and Barchart's survey shows a mean price target of $128.03.

However, AnaChart.com, which tracks recent analysts' recommendations, has an average price target from 36 analysts of $135.56 per share. That is close to my projection of $141 over the next 12 months.

The bottom line is that investors in today's options believe AMD stock could move significantly higher. Based on the underlying value of Advanced Micro Devices' earnings and cash flow, there can be good upside in the stock.

However, whether that will occur in the next two days is not clear. Investors should be careful not to blindly followthese short-term option trades without understanding the risks. The Barchart Learn Center for options can help investors understand the risks of options trading.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.