Swing Trade AMD

1 year ago

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Quantum computing concept. Abstract glowing physics circuit.

Advanced Micro Devices (NASDAQ:AMD) is 1 of nan largest exertion companies globally, though still overmuch smaller than immoderate of nan multi-trillion dollar exertion companies. The institution focuses manufacturing compute and graphics processors, pinch a marketplace capitalization of astir $130 billion, smaller than nonstop competitors specified arsenic Nvidia (NVDA) aliases Intel (INTC).

However, nan company's displacement to manufacturing pinch TSMC (TSM), successful a superior intensive business, mean it has been capable to regain ground. We past recommended investing successful November, and since past nan company's stock value has gone up 40% vs. 7% for nan S&P 500. Now that AMD banal value is loftier, arsenic we'll spot done this article, nan consequence facing nan institution intends we urge selling.

AMD's Diversified Business

AMD has managed to build up a diversified business, particularly successful nan datacenter wherever it's grown from efficaciously nary marketplace stock to almost 18%, astir each taken from Intel.

The institution has built up a datacenter business pinch a attraction connected server CPUs, GPUs, FPGAs, and different chips. The company's besides built up a respectable customer business and gaming business. The company's customer business is competitory against Intel but its GPU business struggles to beryllium viewed arsenic beardown against Nvidia, though Nvidia has made immoderate missteps here.

The company's embedded business, supported by its Xilinx business, continues to turn arsenic well. The institution has expanded its business successful caller years, though immoderate specified arsenic Xilinx, person been astatine an costly price.

AMD 2022 Results

The institution had beardown 2022 results, though weakness

The institution had almost $24 cardinal successful revenue, up 44% YoY, though nan weakness successful nan markets was much visible successful nan past quarter. The company's 4Q gross was $5.6 cardinal versus $4.8 cardinal successful 4Q 2021, representing conscionable nether 17% maturation for nan 4th YoY. Perhaps much disappointingly, GAAP margins decreased 3% YoY while non-GAAP accrued 4%.

That indicates nan play of separator maturation for nan institution is complete arsenic well, pinch 51% non-GAAP successful 4Q 2022 versus 50% non-GAAP successful 4Q 2021. Xilinx amortization has wounded GAAP revenue, but it's clear from some a separator and gross perspective, pinch a tougher marketplace expected successful 2023, nan company's maturation has slowed down.

AMD Shareholder Return Pressure

In our view, 1 of nan awesome risks nan institution is facing, is continued request for shareholder returns.

The institution has started fierce stock buybacks, moreover though from a semipermanent perspective, it hasn't locked successful nan spot of its assets. After years of struggling, it seems for illustration nan institution is facing much unit from shareholders to thrust further shareholder returns, whether it's nan champion clip for them aliases not.

That resulted not only successful dilutive Xilinx acquisitions, but important stock repurchases astatine higher prices. We'd for illustration to spot nan institution build up nan spot of its equilibrium expanse first.

AMD 2023 Outlook

The company's 2023 outlook highlights imaginable weakness successful nan market.

The company's existent guidance is for $5.3 cardinal successful 1Q gross down 10% YoY pinch ~50% gross margins and $1.6 cardinal successful operating expenses. The institution doesn't look apt to repurchase shares noticeably done nan twelvemonth pinch a astir changeless stock count and we expect gross for 2023 to beryllium beneath 2022.

However, location does look to beryllium nan imaginable for separator description going into nan extremity of nan year. With a $130 cardinal marketplace capitalization, nan institution will struggle to make nan returns to warrant its valuation, and that's not counting nan important consequence complete nan coming years.

AMD TSMC Risk

Unfortunately for AMD 1 of nan things that has helped it substantially nan past respective years, Intel's ain node delays, mightiness beryllium coming backmost to wounded it. There are 2 starring 3 nm producers but rumors are there's a important hold successful TSMC's 2 nm process. Additionally, while Samsung is besides a awesome 3 nm shaper there's nary indications it tin grip AMD's volume.

More truthful were Samsung to summation immoderate activity complete TSMC we expect that different TSMC customers much in-need of capacity (i.e. Apple) would hit AMD to nan punch for immoderate measurement increases. Intel Foundry astatine this constituent is simply a tube dream, moreover though it's 1 pinch potential, successful position of its expertise to compete for high-volume business.

However, nan aforesaid rumors bespeak that Intel could seizure process node activity arsenic soon arsenic adjacent year, though it could beryllium into 2025. That intends that Intel's processors and now GPUs could propulsion up of some AMD and Nvidia, hurting AMD successful nan aforesaid measurement that its been capable to compete pinch Intel successful caller years.

AMD and Intel Customer Loss Risk

AMD and Intel some person a important risk.

Their largest customers, companies for illustration Apple, Amazon, Google, and Microsoft person grown to specified standard that its cheaper for them to build their ain dedicated processors than to acquisition it from Intel and AMD. Apple moving distant from Intel for its laptops was possibly nan astir important motion of this for investors.

We spot this consequence arsenic being incredibly pronounced and apt to turn arsenic smaller companies move distant from information centers to hosting their applications connected nan unreality astatine places for illustration AWS. That could wounded nan size of nan marketplace long-term.

Our View

AMD tends to beryllium a very volatile institution arsenic a changing marketplace and nan aggravated superior requirements of its business mean that its profits up and down rapidly. That's mixed pinch changing sentiments successful nan markets that impact nan company's banal value overmuch more. This is intelligibly evident pinch Nvidia's banal value since nan Open AI launch.

At AMD's existent valuation on pinch our expected weakness for nan marketplace successful 2023, we spot AMD arsenic overvalued astatine this clip and urge selling. The company's non-GAAP EPS for 2022 was $3.5 and moreover pinch viewing nan 2023 downturn arsenic impermanent and assigning a semipermanent P/E of 20, we position nan company's semipermanent valuation astatine astir $70 / share.

The plaything waste and acquisition opportunity is based connected really nan company's marketplace worth fluctuates astir wherever we spot nan semipermanent value. When we recommended investing it was astatine little than $60 / share. Long-term we spot nan worth astatine astir $70 / share. At its existent value of astir $80 / share, we urge trading your finance successful nan company.

Thesis Risk

The largest consequence to our thesis is that computing request is increasing semipermanent and AMD represents a awesome subordinate pinch integrated assets. Another misstep by Intel, which is not astatine each unlikely, could thief nan company's business particularly successful nan very profitable datacenter conception for nan company. Similarly ample tech companies could determine building processors isn't worthy nan cost.

All of this could thief nan company's earnings.

Conclusion

AMD has seen its banal value spell up substantially since November. That's contempt a decaying macroeconomic environment, nan company's 1Q 2023 gross is expected to spell down YoY and margins stay flat. We don't spot YoY gross betterment successful nan cards for 2023, which could wounded nan institution substantially.

On apical of this, nan institution is facing important competition. That's some for its industry, arsenic ample tech companies make their ain processors, and from increasing title from Nvidia and Intel that are ramping up their superior spending. TSMC node delays could besides wounded nan institution substantially. Overall, we urge against investing successful AMD.

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