AMD: Still Bullish, But Don't Expect Outsized Gains Anytime Soon

Justin Sullivan

Introduction

We previously explored nan hallmarks of Advanced Micro Devices, Inc. (NASDAQ:AMD) and touched upon why it could service arsenic a useful portfolio stock. Whilst we are still mostly sanguine astir nan semipermanent narrative, caller developments person prompted america to temper our expectations for outsized gains, astatine slightest successful nan short run. Here's why.

A Few Short-Term Concerns

AMD's business prospects look to person made an intermediate highest sometime successful Q2-22, and since past rather a fewer metrics person turned south. Prima facie, it besides does not look for illustration nan upcoming Q1-23 results - which will beryllium published sometime successful precocious April aliases early May - will make ample oomph for marketplace participants. In fact, aft quarters and quarters of double-digit yearly gross growth, AMD's group gross looks poised to diminution by -10% successful Q1.

AMD net presentation, YCharts

Headwinds successful nan PC manufacture will apt proceed to beryllium a resistance connected AMD's prospects for yet different quarter, astatine nan very least, though IDC expects a betterment to return spot only by precocious FY23/early FY24! After falling past year, world PC shipments now look group to diminution for yet different year, pinch an expected diminution of ~6% successful 2023.

AMD's guidance highlighted immoderate sequential improvements successful transmission sell-throughs successful Q4, but this was apt much of a seasonal bump, and I deliberation Q1 could beryllium a spot much subdued. If anything, you will apt spot promotions and value incentives proceed to beryllium a ascendant characteristic going into Q1 arsenic well, arsenic nan various income channels activity to get free of aged products. This looks group to adversely effect nan non-GAAP gross separator successful Q1 which had shown a marginal sequential betterment of little than 100bps successful Q4. Q1 could apt spot it dip backmost to nan 50% levels. For nan uninitiated, AMD's semipermanent extremity is to get GM complete nan 57% level.

AMD Earnings Presentation

Inventory challenges aren't constricted to nan PC and gaming segments alone; moreover AMD's high-potential information halfway business is apt to witnesser gross diminution successful Q1 and perchance Q2, arsenic immoderate of their unreality customers are still dealing pinch elevated levels of inventory. AMD has awesome ambitions of ramping up nan accumulation of its high-priced 4th Gen EPYC processors- Genoa, but 1 wonders if they will overshoot their volumes successful an ambiguous situation specified arsenic this.

All successful all, AMD whitethorn proceed to nether vessel inventory to its channels and clients for nan foreseeable future, moreover arsenic their ain heightened inventory levels proceed to ramp up connected nan equilibrium expanse and dampen rate travel generation, which was thing I had praised successful my erstwhile article.

The inventory days precocious crossed nan landmark of 100 days and is nan highest it's been, since Q1-19. To contextualize things, statement that AMD has historically kept its days successful inventory astatine only 80 days aliases so.

YCharts

Nonetheless, nan ample inventory build-up has been instrumental successful driving down AMD's FCF separator (FCF generated per dollar of sales) to single-digit levels, nan lowest level since nan 2nd 4th of 2020!

Quarterly reports

Then, if 1 looks astatine nan astir caller method conditions of AMD's stock, location are immoderate encouraging, and not-so-encouraging factors to note.

What's bully is that it looks for illustration nan downtrend which was successful spot since Nov 2021 looks to person travel to an extremity for now. Since precocious 2021 till early 2023, nan banal had been trending little successful a bid of little lows (LL) and little highs (LH) connected nan play chart, forming a descending transmission successful nan process. Recently we've seen nan banal shun that erstwhile inclination of successive LLs and LHs, arsenic it collapsed past nan precocious bound of nan channel.

Investing

It's bully to spot that breakout, but it appears arsenic though astir of nan caller momentum has been retail-driven, pinch constricted organization support. This prompts maine to wonderment if nan breakout will person capable legs.

Firstly, statement that immoderate spot we've seen has travel connected nan backmost of comparatively debased volumes. Typically, complete nan past 5 years, nan AMD antagonistic has witnessed regular volumes to nan tune of complete 70m. The image beneath highlights really nan uptrend has travel connected nan backmost of volumes that were astir 15%-20% little than nan mean.

YCharts

We besides statement that moreover though AMD roseate successful January, nan number of institutions that ain nan stock, and nan nett shares owned by them, really declined rather importantly successful nan month.

YCharts

Closing Thoughts - AMD Still Offers Good Value And Risk-Reward

Despite a fewer near-term concerns, we're still enthused by a fewer sub-plots astir notably nan favorable risk-reward vs. different semi-peers, and nan guardant valuations of nan stock.

The image beneath shows you really AMD's banal is positioned comparative to a portfolio that focuses connected nan 25 largest companies successful nan semiconductor accumulation and instrumentality space.

Stockcharts

We tin spot that AMD offers bully worth for those looking for rotational opportunities successful nan semi-space, arsenic nan existent comparative spot ratio is ~58% little than nan mid-point of nan semipermanent range. Even if you deliberation nan semipermanent mid-point is simply a measurement excessively far, and only want to attraction connected nan peaks and troughs since nan pandemic, statement that this ratio has typically oscillated betwixt 0.3 and 0.5, and is presently a batch person to nan little extremity of nan boundary, and could activity arsenic a useful campaigner of mean-reversion.

YCharts

The bargain lawsuit is besides augmented by favorable valuations comparative to nan mean. Consensus estimates presently expect AMD's FY24 EPS to travel successful astatine $4.38. Based connected nan existent price, you're looking astatine a guardant P/E of little than 20x, which would construe to a ~32% discount comparative to nan 5-year mean. That EPS fig would besides connote coagulated YoY net maturation of ~44% successful FY24! For a high-growth banal that typically trades astatine PEG (PE/ Earnings growth) levels of complete 1x, that is rather a bargain erstwhile you see nan existent PEG of 0.45!

Investment research, chiefly oriented towards uncelebrated/under-covered stocks and ETFs, crossed North America, Europe and Asia. Seeks to harvester some basal and method disciplines while making an investment/trading proposition.