AMD: Sell If You Really Believe
Summary
- Revenue growth cliff has now come, excluding Xilinx.
- Xilinx premium hits new high as deal completion nears.
- Stock well above short-term moving average.
Last week, shares of chipmaker Advanced Micro Devices (NASDAQ:AMD) were one of the street's biggest winners, soaring after the company announced its second quarter results. Not only did management announce strong top and bottom line beats, but yearly revenue guidance was raised again and the gross margin forecast was hiked. While the name seems to be firing on all cylinders right now, the recent rally might be a good time for investors to take some profits.
Q2 revenues of $3.85 billion were nearly a quarter of a billion dollars above the average street estimate and just missed showing 100% growth over the prior-year period. The gains were led by Enterprise, Embedded and Semi-Custom segment revenue up 183%, while the Computing and Graphics segment saw 65% growth. Management also gave a very strong forecast for Q3, nicely above street expectations, while bumping its yearly forecast to 60% revenue growth from the previous forecast of a 50% increase.
This was the second straight quarter where revenue growth saw a 9 handle, but it also gets us to a critical point. Thanks to previous years' success, AMD is now about to hit a revenue growth cliff as shown in the chart below. The blue lines represent current estimates looking forward, and current street estimates likely exclude any contributions from Xilinx (XLNX) until the deal is finalized. Yes, AMD is still growing nicely, but investor sentiment could change a little when organic growth rates drop considerably.
(Source: Seeking Alpha AMD earnings page, seen here)
AMD's margin profile is also starting to look better. I was surprised that the gross margin forecast was not raised at the Q1 report given the revenue upside that was seen. However, management hiked its forecast at the Q2 report from 47% to 48% on a non-GAAP basis. In the second quarter, the non-GAAP bottom line of $0.63 beat by nearly a dime, and the company is now reporting sustainable and growing profits.
While shares of AMD were up about $14 last week, with the rally continuing on Monday, it was interesting to see Xilinx shares not rally as much, especially on a percentage basis. AMD management still expects the major acquisition to close by the end of this year, and the growing deal premium is likely to add more merger arbitrage folks to these names. After Monday's finish, Xilinx shares are now more than $38 below where they should be based on the deal price, meaning almost 26% potential upside for Xilinx if the gap were to close as shown below.
(Price data sourced from Yahoo! Finance - last data point on chart is close of trading for Monday, August 2nd)
If you really believe in AMD's future, especially post-Xilinx deal, then buying Xilinx shares now is like buying AMD at a significant discount. Shares of AMD are also just about a dollar from their average street price target as of Monday's close, showing that analysts believe the name is pretty fairly valued. Another catalyst that could diminish is AMD's buyback, as management bought shares back under $80 during Q2. I don't know how aggressive the repurchase plan will be now above $108, especially as the Xilinx deal closing approaches.
I mentioned in a previous article that I thought the stock was worth $100 by the end of 2023. I'm now raising my valuation to $120.40, based on a 28 times multiple (up from 25 thanks to these strong results) of $4.30 in non-GAAP EPS (up from $4.00). Even if I reduce my discount factor to 7% thanks to better results, and adjust for the three months of time in the books since, my present value figure only comes to $103.40.
Another reason I'm a little wary of AMD shares is where the stock is on a technical basis. As you can see in the chart below, shares are now roughly $22 above the 50-day moving average (purple line). While that key technical trend line will rise moving forward, AMD shares have had a rough time when they get this extended. We're also getting closer to a potential Fed tapering start, which could lead to the overall market pulling back a bit, especially hurting high growth names like AMD.
(Source: Yahoo! Finance)
AMD shares staged a nice rally after last week's strong earnings report, but things look a bit extended currently. Beating estimates and raising guidance is nice, but a sentiment change could come as an organic revenue cliff starts with the current quarter. As the deal premium for Xilinx shares continues to hit new highs, AMD shares become less attractive as we approach the deal's close. Finally, shares have soared well above their 50-day moving average, a spot where the valuation seems a little lofty and the stock has been pressured in the past. While I believe in the long-term story here, I think investors will have a better opportunity in the coming months.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (241)
This fool: Uh, Oh!, Q3 is coming! Just look at this chart of mine, they are gonna struggle to even beat Q42020, back when they had the ABF shortages that are now solved.
TSMC has the best fabrication facilities at leading node production (5nm) and starting to build 3nm.
INTC is transitioning into a business model that includes "fabrication for hire".
NVDA wants to purchase ARM for the ARM CPU (amongst other things).
AMD is TSMC largest customer behind APPL.
INTC is rumored to be trying to compete with APPL for the entire TSMC 3nm wafer production.
AMD is entering smart phone market with Samsung (which is the second largest producer of leading edge node wafer.
INTC is rumored to be buying Global Foundries which has a wafer supply agreement with AMD at the 12nm node size.
Both AMD/XLNX merger and the NVDA/ARM purchase need China approval.All these facts when tumbling around in my mind while I am trying to sleep! When I suddenly wake up with this solution!What if AMD creates a "Joint Venture" with TSMC to a fabrication facility too 12nm, 7nm and 5nm wafer production factory in the USA The USA factory could be built so it could produce the 3nm production when machines become available from ALSM. AMD would get as much of the production as they wanted at a set cost basis and any additional supply (created by improved methods or materials of production would benefit TSMC not AMD). This would secure wafer supply for AMD, bring leading edge manufacturing to the USA, remove the threat to AMD wafer supply from GF if acquired by INTC and give AMD access to the wafers to actually produce the product to compete with NVDA in the server GPU space. The final part of this puzzle is that AMD has already done "joint ventures" with companies in China so not only does AMD have joint venture experience BUT .... wait for it.... AMD AND TSMC COULD CREATE ADDITIONAL JOINT VENTURES WITH CHINA COMANIES TO MAKE WAFERS EXPLICITLY FOR THE CHINA MARKET JUST AS AMD DID WITH X-86 CPU. By doing this is would also give china a reason to approve the AMD/XLNX merger quickly!Could AMD leverage the sudden rise in share value and give TSMC a 25% stake in AMD to create the 50% (around $35 billion at todays share price) of the funding to build in the USA? This would be an almost direct attack back at the INTC buying of GF and even the new INTC fabrication business model! Your thought would be appreciated!
AMD headed for it's own ARM version and shift from
PC to Cell Phones for growth.
XLNX brings 5G and wireless
Infinity Fabric for cellphone computing
CPU GPU 5G and data storage all on I.F.
Collective processing may work too once on shared network.
Samsung needs something brand new to go against Apple
China does not generally block mergers, try to buy a Chinese company that's different
4 month left to go and middle of summer vacation slow time
Sell in May .... see you in Sept
Hold both
AMDstockcharts.com/...MU Just breaking out have to see if it can keep it upstockcharts.com/...stockcharts.com/...
good for an emergency fund only.
AMD was going to the moon before this article. It's in the gripes of WallStreetBets and RobinHood.www.reddit.com/..."Daily Popular Tickers Thread for August 03, 2021 - AMD | GME | TSLA"
Valuation is changing based on the new available PE. You can't just look a the moving average of PPS.