Downgrading AMD, Exiting Position After Big Miss
As AMD shares see a major drop following disappointing earnings, here's how I plan to get out of my holdings.
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Advanced Micro Devices AMD has reported and the market was not impressed.
In full disclosure, I still own some, not a lot, of AMD. I had started to rebuild the position ahead of earnings adding on the DeepSeek weakness early last week. Fortunately, I had not gotten very far before Tuesday night's sell-off. Is all lost for this once very promising name with the charismatic CEO? Let's explore.
For the firm's fourth quarter, which ended December 28, Advanced Micro Devices posted an adjusted EPS of $1.09 (GAAP EPS: $0.31) on revenue of $7.658 billion. While the top-line result beat Wall Street and reflected year-over-year growth of 24.2%, the bottom-line results were not very pretty. The adjusted print just met expectations, while the GAAP print missed by quite a lot. If there was a bright spot, it had to be in improving margins at both the gross and operating levels. The adjustment made was almost entirely ($252 million) for the purpose of the amortization of acquisition-related intangibles.
Operations
As mentioned above, for the quarter reported, sales grew 24.2% to $7.658 billion. the cost of those sales increased 15.9% to $3.776 billion. That left a gross profit of $3.882 billion (+33.4%), as gross margin improved from 47% to 51%. GAAP operating expenses increased 17% to $3.022 billion, leaving a GAAP operating income of $871 million (+155%) as the firm's GAAP operating margin improved from 6% to 11%. Once adjusted, operating income grew 18% to $2.026 billion, as operating margin improved from 23% to 26%.
After accounting for interest, other income and expenses and taxes, GAAP net income printed at $482 million (-27.7%) as GAAP EPS landed at $0.29, down from the year-ago comparison of $0.41. Adjusted, net income printed at $1.777 billion (+42%), as the adjusted EPS of $1.09 was up from $0.77 for the year-ago period.
Segment Performance
- Data Center generated revenue of $3.859 billion (+69.1%), producing operating income of $1.157 billion (+73.7%). Great performance, but a steep deceleration from the 122.1% sales growth for the third quarter.
- Client generated revenue of $2.313 billion (+58.3%), producing operating income of $446 million (up from $55 million). Great performance, but a mild deceleration from the 61.8% sales growth for the year-ago comparison.
- Gaming generated revenue of $563 million (-58.8%), producing operating income of just $50 million (-77.7%). Seventh consecutive quarter of contracting year-over-year sales.
- Embedded generated revenue of $923 million (-12.7%), producing operating income of $362 million (-21.5%). Great performance, but a steep deceleration from the 122.1% sales growth for the third quarter. Sixth consecutive quarter of contracting year-over-year sales.
Fundamentals
For the period, AMD generated operating cash flow of $1.299 billion, out of which came capex spending of $208 million. This left free cash flow of $1.091 billion as free cash flow margin improved from 4% to 14%. The firm repurchased only $256 million worth of common stock for its treasury and does not pay out cash dividends to shareholders.
Turning to the balance sheet, AMD ended the quarter with a cash position of $5.132 billion and inventories of $5.734 billion. That put current assets at $19.049 billion. Current liabilities add up to $7.281 billion that includes no short-term debt. The firm's current and quick ratios now stand at 2.62 and 1.83, respectively. These ratios are quite strong and reflective of a well-managed balance sheet.
Total assets amount to $69.226 billion, including goodwill and acquisition-related intangibles of $43.769 billion. At 63% of total assets, this is something that makes me uncomfortable. That said, without the acquisition-related portion of these intangibles, that percentage would drift down to 35.9% which is high for me, but not crazy high. Total liabilities less equity comes to just $11.658 billion. There is only $1.721B worth of debt (all long-term) on the books. This is a solid balance sheet, even taking the intangibles into account.
Guidance
For the current quarter, the firm sees revenue generation of roughly $7.1 billion, give or take $300 million. This is slightly above the consensus view for $7.03 billion, and would be good for year-over-year growth of 30%, but a contraction of 7% sequentially. Gross margin is seen at about 54%, which would be a sequential improvement.
Wall Street
Since these earnings were released last night, I have come across 21 highly-rated (four-plus stars at TipRanks) sell-side analysts that have opined on AMD. Among the 20, there are 14 "buy" or buy-equivalent ratings and seven "hold" or hold-equivalent ratings. Two of the "holds" did not set target prices, so we have just 19 of those to work with.
After allowing for changes, the average target price across those 19 analysts is $151.79 with a high of $225 (Hans Mosesmann of Rosenblatt Securities) and a low of $125 (Stacy Rasgon of Bernstein). Once omitting those two as possible outliers, the average target falls to $149.05. Because I know that you're interested, the average "buy" target is $159.07, while the average "hold" target stands at $131.40.
My Thoughts
Needless to say, I am disappointed in Advanced Micro Devices. I had whittled my long position down to something small on the way down and felt that I had done a good job of managing the position as the share price withered. I did start to rebuild that position recently, which was a mistake. Fortunately, this stock is still not a top 15 long-side weighting for me, so I'm not getting crushed, but is a P/L negative, nonetheless.
The setup here is troubling. Readers will see a hand-drawn falling wedge pattern, which is a pattern of bullish reversal. However, this morning's gap lower opening has taken the last sale below the lower trendline of the wedge. That had been supported. A downward breakout from a bullish pattern of reversal can be a very negative sign. Relative strength is weakening, and the daily MACD is postured quite bearishly with all three components below the zero-bound. Not to mention, the shares are now trading well below all three of the stock's major moving averages.
Unfortunately...
I am going to downgrade AMD to a "sell" and work toward exiting the position completely. I will take a loss that I can stand on the recent purchases, but I'm a big boy. This was one of my best performing stocks in 2023 and what's left of my position is still up from net basis.
Do I plan to re-enter at some point? Of course, but I will have to see something constructive first from a technical perspective. CEO Lisa Su and her balance sheet are too good at her job to stay down forever.
At the time of publication, Guilfoyle was long AMD equity.
