AMD Posts Beat, Gets Whopped, and I'm Still Rooting for Lisa Su. Here's Why

Advanced Micro Devices  (AMD)  reports ... and gets its tail kicked. That wasn't part of my plan. 

But even down 3.7% on Tuesday and an additional 3% or so overnight, the stock is up 155% over six months. I think I'll live. AMD posted an adjusted earnings per share of $1.20 (unadjusted EPS: $0.75) on revenue of $9.246 billion. Those top- and bottom-line numbers all beat Wall Street's expectations, while the sale growth amounted to year-over-year growth of 36%. 

"We delivered an outstanding quarter, with record revenue and profitability reflecting broad based demand for our high-performance EPYC and Ryzen processors and Instinct AI accelerators. Our record third quarter performance and strong fourth quarter guidance marks a clear step up in our growth trajectory as our expanding compute franchise and rapidly scaling data center AI business drive significant revenue and earnings growth," said CEO Lisa Su in the press release. 

CFO Jean Hu chimed in, “We delivered record quarterly revenue of $9.2 billion, up 36% year-over-year, and generated record free cash flow, reflecting the strength of our leadership portfolio and disciplined execution. Our continued investments in AI and high-performance computing are driving significant growth and position AMD to deliver long-term value creation.”

Operations 

As mentioned above, sales increased 36% to $9.246 billion. The cost of sales grew 31% to $4.466 billion, leaving a gross profit of $4.78 billion (+40%) as gross margin improved from 50% to 52%. On a unadjusted basis, operating expenses increased 30% to $3.51 billion, leaving operating income of $1.27 billion (+75%) as operating margin grew from 11% to 14%. On an adjusted basis, operating expenses grew 42%, and operating income grew 30% as operating margin dropped from 25% to 24%. 

After accounting for interest, other income and expenses and taxes, GAAP net income printed at $1.243 billion (+61%). This works out to $0.75 per fully diluted share, up from the year-ago comp of $0.47. After adjusting, net income printed up 31% at $1.965 billion. That works out to $1.20 per fully diluted share, up from $0.92 a year ago. Adjustments were made primarily for both the amortization of acquisition-related intangibles and stock-based compensation expense.

Segment Performance

- Data Center... generated revenue of $4.341 billion (+22.3%), producing an operating income of $1.074 billion (+3.2%).

 

- Client & Gaming... generated revenue of $4.048 billion (+72.8%), producing an operating income of $867 million (+201%. not a typo).

 

- Embedded... generated revenue of $857 million (-7.6%), producing an operating income of $283 million (-23.9%).

Guidance 

For the current quarter, AMD is projecting revenue of roughly $9.6 billion within a range spanning from $9.3 billion to $9.9 billion. At $9.6 billion, this is well above the $9.2 billion that Wall Street had in mind and also would be good for year-over-year growth of 25%. Adjusted gross margin is seen at roughly 54.5%. No revenue is projected to be driven by sales of Instinct MI308 chips to the Chinese market.

Fundamentals 

For the period reported, AMD generated operating cash flow of $1.788 billion (+185%). Out of that number came capital spending of $258 million (+95%). This left free cash flow of $1.53 billion (+208%). The company did not return capital to shareholders. 

Turning to the balance sheet, AMD ended the quarter with a cash position of $7.243 billion and inventories of $7.313 billion. This puts current assets at an even $27 billion. Current liabilities add up to $11.7 billion, which includes just $873 million in shorter-term debt. This puts the current and quick ratios at a beefy 2.31 and 1.68 respectively. 

Total assets amount to $76.891 billion. About $25 billion of that is labeled as goodwill, which I am fine with. An additional $17.3 billion is labeled as acquisition-related intangibles. Hard to put an accurate value on that sort of thing. Total liabilities less equity comes to just $16.1 billion, so it's not like those intangibles are needed to make this balance sheet appear stronger. This is a strong balance sheet. Long-term debt stands at $2.347 billion, which is dwarfed by the cash position.

Wall Street 

Since last night, I have noticed 15 sell-side analysts rated at five stars out of five by TipRanks that have opined on AMD. Among those analysts, we have no upgrades or downgrades. We have nine reiterated buy or buy-equivalent ratings and six reiterated hold or hold-equivalent ratings. Interestingly, we do have 11 target price changes and all 10 are to the upside. Those target price increases were made from an average of $245.36 to an average of $287.64.

My Thoughts 

There is a lot to like here. Sales are hot in all the right places. Margin is fine. Guidance is strong. Cash flows are growing like a weed. The balance sheet is in excellent condition. Oh, and they have all-star CEO Lisa Su, who hails from Queens, NY as do I. Rock on. ​

This looks a lot like the chart that I showed readers in the not-too-distant past (Oct. 9). That's because the breakout that I projected at that time actually happened. That was the day that I put my $302 target price on the stock, up from $234. That's no longer Wall Street-high, by the way, though it was at the time. 

Now, Relative Strength is just south of what many consider to be technically overbought territory, but still quite robust. This is after moving in and out of overbought territory for about a month.

Below the chart, the daily Moving Average Convergence Divergence has some issues. The histogram of the 9-day exponential moving average appears to have moved ever so slightly into negative territory. The 12-day and 26-day EMAs also both remain well into positive territory. On Tuesday, however, the 12-day line crossed below the 26-day line. That can be a short-term bearish set-up unless we see a quick reversal of that "cross-under" on Wednesday.

The reality is that AMD needs to consolidate and a little sideways trading action would probably be exactly what the doctor ordered for this stock so that it can take another leg higher. I am not discouraged in the least by the recent weakness. I am further encouraged by the strength of the business. I am not going to add to my long position just yet. I want to see if a trading range develops into a base of consolidation. That would at least provide us with a new pivot.

Target Price: $302 (reiteration)

Pivot: $267 (recent high)

Add: Down to 50-day SMA (currently $195)

Panic: Loss of the 200-day SMA (currently $141)

At the time of publication, Guilfoyle was long AMD equity.