Before we get to my “best bet” for the coming year, I want to put this whole “New Year Stock Pick” thing in perspective.
You know the first part: I am going to give you a name that I am in or will be in myself. I will update you throughout the year as I manage that position. That’s a promise. I will not leave anyone in the dark. As always, we may win, we may lose, but I won’t let you do this alone.
But here’s the catch — and something just as important as the pick itself. Nobody I know sits down and initiates a long position in a name as the calendar turns with the intention of holding that name for one year. In fact, what many people may not realize from reading these picks, is that seasoned traders use various investing tools such as target prices and panic points — as well as options — for these trades. These tools give us more control over when we exit a position than does the mere passage of time. Regular readers know darn well that I refuse to lose more than 8% on any position, unless it happens while I am asleep.
Now let’s get to my pick. It’s a name with upside potential going into 2023 — but we may not hold it all year. My pledge is simple: As I manage the position, I will be public about it. I will keep readers up, either in print with a potential lag or in near real-time on Twitter or on cable TV.
Without Further Eloquence…
Since mid-December, we have seen a number of sell-side analysts come out in defense of Advanced Micro Devices — more so than they have for other chip names. Morgan Stanley’s Joseph Moore, who is rated five stars by TipRanks, said two weeks ago that AMD “remains the worst performing stock in large cap (semiconductors) despite the fact that their server roadmap demonstrably improved its technology leadership position over the course of the year.” AMD is Morgan Stanley’s top chip pick for 2023.
Earnings
Advanced Micro Devices is expected to report fourth-quarter financial results late in January. Consensus view is adjusted earnings per share of $0.67, within a range spanning from $0.58 to $0.71 on revenue of $5.52 billion within a range spanning from $5.45 billion to $5.66 billion. This compares to $0.92 for the year-ago comp and on a year-over-year basis would amount to growth of 14.4%.
For the full fiscal year 2022, should consensus estimates for the fourth-quarter be realized, AMD will have posted adjusted EPS of $3.52 on revenue of $23.52 billion. These numbers would come to earnings growth of 26% on revenue growth of 43%. Early expectations for fiscal year 2023 are for adjusted EPS of $3.65 on revenue of $24.93 billion. In what has to some degree already been priced in as a tough year, that would be earnings growth of 3.7% on revenue growth of 6%.
For the most recent quarter reported, AMD posted adjusted EPS of $0.67 on revenue of $5.565 billion. Both top and line performance did fall short of already reduced expectations at the time. But adjusted net income printed up 23% at $1.095 billion, as revenue was good for growth of 29.2%. Adjusted gross margin, which was a bright spot, improved to 50% from 48%, meeting expectations, as adjusted operating margin decreased from 24% to 23%.
Segments
Gaming: Third-quarter net revenue increased 13.7% to $1.631 billion, producing $142 million in operating income (-38.5%). The firm has projected a lack of growth going forward for this segment.
Data Center: Net revenue increased 45.2% to $1.609 billion, producing $505 million in operating income (+64%). The firm has projected continuing growth going forward for this segment.
Embedded: Net revenue printed at $1.303 billion, up from $79 million, producing $505 million in operating income, up from $23 million. The company has projected continuing growth going forward for this segment.
Client: Net revenue decreased 39.6% to $1.022 billion, producing $26 million in operating loss, down from $490 million in income. AMD has projected a lack of growth going forward for this segment.
The Balance Sheet
As of September, which is the most recent data available, free cash flow creation had remained strong through the troubled third quarter. As for the balance sheet, AMD ended the period with a net cash position of $5.591 billion and inventories of $3.369 billion. This showed a 27% increase in inventories over the past three months, which will have to be watched.
That places current assets at $14.42 billion due to growth in accounts receivable. Current liabilities add up to $6.691 billion, which is also higher due to increased accounts payable. This placed the firm’s current ratio at 2.16 and the firm’s quick ratio at 1.65 (even with increased inventories). These ratios are very strong. Not to be ignored. AMD is, in my opinion, well set up to weather the current and coming storms.
Total assets add up to $67.811 billion. This included “goodwill” of $24.187 billion, which at 35.7% of total assets is indeed higher than I like, but certainly not out of line with what is normal. Total liabilities less equity comes to just $13.269 billion, including $2.466 billion, in long-term debt. In September, AMD could pay off this debt more than two times over out of pocket. In short, this balance sheet is in excellent shape.
My Thoughts
While I remain long AMD, I am down to less than 20% in terms of shares of where this position was less than a year ago. As I have mentioned, positions must be managed, and need regular maintenance. This has been a year during which investors were forced to trade names like this far more frequently than they had in the past. I enter 2023 expecting more of the same in that regard.
I have great faith in the abilities of CEO Lisa Su. Still, inventories remain a problem that will take time to reset. Corporate spending on the data center and digitization, as well as gaming, could be subject to changing domestic and global macroeconomic conditions. The entire Chinese market is subject to U.S.-Sino relations. I will add that at some point in 2023, though there could be new issues to contend with, Some resolution or at least a level of increased clarity could be brought to bear on the current environment.
For the medium-term, AMD remains in the same downtrend that the name has been in since the reversal of November 2021. U.S. and global economies could take a turn for the worse at some point in the first half of 2023. Names like this would suffer through any period of contracting economic activity.
I feel that if this name works, a period of technical consolidation will be necessary after a potentially sharp move early in 2023. (The closing wedge (dark blue) signals short-term volatility. Then, if all goes according to plan, AMD will have set the stage to an upward acceleration in share price into the second half, or fourth quarter, of 2023.
My target price for AMD is currently $80. This would require a take and hold of the 50-day simple moving average. That would then set the shares up for a fight at the 200-day simple moving average. We’ll worry about that, though, after reaching the target. I am going to run with a short-term panic point of $59. Should that level be triggered, I currently see the ows of October as a landing spot for potential re-entry.
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