Swing Trade AMD
vchal
$Advanced Micro Devices(AMD)$ (NASDAQ:AMD) is one of the largest technology companies globally, although still much smaller than some of the multi-trillion dollar technology companies. The company focuses manufacturing compute and graphics processors, with a market capitalization of roughly $130 billion, smaller than direct competitors such as $NVIDIA Corp(NVDA)$ or $Intel(INTC)$.
However, the company's shift to manufacturing with TSMC (TSM), in a capital intensive business, mean it has been able to regain ground. We lastrecommended investing in November, and since then the company's share price has gone up 40% vs. 7% for the S&P 500. Now that AMD stock price is loftier, as we'll see through this article, the risk facing the company means we recommend selling.
AMD's Diversified Business
AMD has managed to build up a diversified business, especially in the datacenter where it'sgrown fromeffectively no market share to almost 18%, nearly all taken from Intel.
AMD Investor Presentation
The company has built up a datacenter business with a focus on server CPUs, GPUs, FPGAs, and other chips. The company's also built up a respectable client business and gaming business. The company's client business is competitive against Intel but its GPU business struggles to be viewed as strong against Nvidia, although Nvidia has made some missteps here.
The company's embedded business, supported by its Xilinx business, continues to grow as well. The company has expanded its business in recent years, although some such as Xilinx, have been at an expensive price.
AMD 2022 Results
The company had strong 2022 results, although weakness
AMD Investor Presentation
The company had almost $24 billion in revenue, up 44% YoY, although the weakness in the markets was more visible in the last quarter. The company's 4Q revenue was $5.6 billion versus $4.8 billion in 4Q 2021, representing just under 17% growth for the quarter YoY. Perhaps more disappointingly, GAAP margins decreased 3% YoY while non-GAAP increased 4%.
That indicates the period of margin growth for the company is over as well, with 51% non-GAAP in 4Q 2022 versus 50% non-GAAP in 4Q 2021. Xilinx amortization has hurt GAAP revenue, but it's clear from both a margin and revenue perspective, with a tougher market expected in 2023, the company's growth has slowed down.
AMD Shareholder Return Pressure
In our view, one of the major risks the company is facing, is continued demand for shareholder returns.
The company has started aggressive share buybacks, even though from a long-term perspective, it hasn't locked in the strength of its assets. After years of struggling, it seems like the company is facing more pressure from shareholders to drive additional shareholder returns, whether it's the best time for them or not.
That resulted not only in dilutive Xilinx acquisitions, but substantial share repurchases at higher prices. We'd like to see the company build up the strength of its balance sheet first.
AMD 2023 Outlook
The company's 2023 outlook highlights potential weakness in the market.
AMD Investor Presentation
The company's current guidance is for $5.3 billion in 1Q revenue down 10% YoY with ~50% gross margins and $1.6 billion in operating expenses. The company doesn't seem likely to repurchase shares noticeably through the year with a roughly constant share count and we expect revenue for 2023 to be below 2022.
However, there does seem to be the potential for margin expansion going into the end of the year. With a $130 billion market capitalization, the company will struggle to generate the returns to justify its valuation, and that's not counting the substantial risk over the coming years.
AMD TSMC Risk
Unfortunately for AMD one of the things that has helped it substantially the last several years, Intel's own node delays, might be coming back to hurt it. There are two leading 3 nm producers butrumors are there's a substantial delay in TSMC's 2 nm process. Additionally, while Samsung is also a major 3 nm producer there's no indications it can handle AMD's volume.
More so were Samsung to gain any leadership over TSMC we expect that other TSMC customers more in-need of performance (i.e. Apple) would beat AMD to the punch for any volume increases. Intel Foundry at this point is a pipe dream, even though it's one with potential, in terms of its ability to compete for high-volume business.
However, the same rumors indicate that Intel could capture process node leadership as soon as next year, although it could be into 2025. That means that Intel's processors and now GPUs could pull ahead of both AMD and Nvidia, hurting AMD in the same way that its been able to compete with Intel in recent years.
AMD and Intel Customer Loss Risk
AMD and Intel both have a substantial risk.
Their largest customers, companies like Apple, Amazon, Google, and Microsoft have grown to such scale that its cheaper for them to build their own dedicated processors than to purchase it from Intel and AMD. Apple moving away from Intel for its laptops was perhaps the most substantial sign of this for investors.
We see this risk as being incredibly pronounced and likely to grow as smaller companies move away from data centers to hosting their applications on the cloud at places like AWS. That could hurt the size of the market long-term.
Our View
AMD tends to be a very volatile company as a changing market and the intense capital requirements of its business mean that its profits fluctuate rapidly. That's combined with changing sentiments in the markets that affect the company's stock price much more. This is clearly evident with Nvidia's stock price since the Open AI launch.
At AMD's current valuation along with our expected weakness for the market in 2023, we see AMD as overvalued at this time and recommend selling. The company's non-GAAP EPS for 2022 was $3.5 and even with viewing the 2023 downturn as temporary and assigning a long-term P/E of 20, we view the company's long-term valuation at roughly $70 / share.
The swing trade opportunity is based on how the company's market value fluctuates around where we see the long-term value. When we recommended investing it was at less than $60 / share. Long-term we see the value at roughly $70 / share. At its current price of roughly $80 / share, we recommend selling your investment in the company.
Thesis Risk
The largest risk to our thesis is that computing demand is growing long-term and AMD represents a major player with integrated assets. Another misstep by Intel, which is not at all unlikely, could help the company's business especially in the very profitable datacenter segment for the company. Similarly large tech companies could decide building processors isn't worth the cost.
All of this could help the company's earnings.
Conclusion
AMD has seen its stock price go up substantially since November. That's despite a decaying macroeconomic environment, the company's 1Q 2023 revenue is expected to go down YoY and margins remain flat. We don't see YoY revenue improvement in the cards for 2023, which could hurt the company substantially.
On top of this, the company is facing substantial competition. That's both for its industry, as large tech companies make their own processors, and from growing competition from Nvidia and Intel that are ramping up their capital spending. TSMC node delays could also hurt the company substantially. Overall, we recommend against investing in AMD.
Source: Seeking Alpha
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