New Price Target for AMD as AI Stock Hits Inflection Point

Readers might recall that, back in early May, after Advanced Micro Devices AMD had reported the firm's first quarter earnings, I had informed subscribers that I was once again long the stock after some time having been out of the stock. 

I informed readers that I was in the early stages of bringing AMD back to a top-ten level allocation in terms of weighting in my most actively traded portfolio, what I refer to as the "Sarge-folio."

Those first quarter earnings were strong where they needed to be. Data-Center-driven revenue was up 57%, while Client-driven revenue was up 68% on a year-over-year basis. The guidance was strong as well. For the second quarter, AMD expected to generate revenue of $7.4 billion, give or take $300 million. That was above the then-consensus of $7.24 billion. Adjusted gross margin was seen at 43%, which included the expected $800 million in charges the firm had projected to cover charges for inventories and other costs related to new U.S. export rules regarding China. Excluding those charges, adjusted gross margin was seen at something more like 54%.

We don't have a date for those Q2 earnings just yet. It will likely be late in the first week or early the second week of August. Wall Street is looking for an adjusted EPS of $0.49 on revenue of $7.42 billion. While for obvious reasons that does not compare well to the year-ago print of $0.69, the sales number does reflect annual growth of more than 27%. That would be the firm's second-best pace for year-over-year revenue growth since Q3 2022. There is a catch though. Of the 36 sell-side analysts I know of who cover AMD, 31 have revised their earnings estimates for the quarter lower since the quarter started. The other five haven't touched their estimates.

Remember...

Intel INTC has been aggressive. In a piece I wrote back in mid-June, I mentioned that over weeks, AMD had announced the sale of data center infrastructure company ZT Systems but had retained the ZT engineering team. The firm had then announced the acquisition of photonics company Ensami, the acquisition of open-source software company Brium and the hiring of the AI hardware and software engineering teams away from AI inference processor startup Untether AI. The reduced margin is probably more than acceptable in light of these events.

Differences of Opinion?

On Tuesday, analyst Christopher Danely of Citigroup, who is rated at five stars by TipRanks, and who has been consistently wrong on AMD, reiterated his "hold" rating on the shares, but increased his target price from $110 to $145. By consistently wrong, I mean that Danely had a "buy" on AMD last year as the stock went from $211 down to $112. He has also had a "hold" on the stock since it bottomed at about $83 in April. The shares closed at $137.82. Basically, this guy is batting .000 in this name. Danley clearly earned his five-star ranking covering stocks other than AMD.

Additionally, on Tuesday, William Stein of Truist Financial, also rated at five stars, reiterated both his "hold" rating and his $111 target price. Clearly, Stein is not a fan, but before we let that rattle us, Stein left AMD at a "hold" since at least October 2020. Over that time, the stock has traded as low as $54.57 and as high as $227.30... and this guy never changed his rating. Hmm... nice work, William. Not.

Finally, a week ago, Vijay Rakesh of Mizuho Securities, who long-time readers know I respect, reiterated his "buy" rating, while increasing his target price to $152. While I'd like to say this analyst is far better than the others because he appears to be on Team Sarge, the truth is that Rakesh has had a "buy" on AMD since January 2020. Bottom line? Listen to and read even highly-rated analysts with a bit of skepticism. Then do your own homework.

The Chart

So, where am I? Still long AMD with a $99 handle. Up 39% since re-entering the name. The stock is currently the eighth largest exposure in the Sarge-folio in terms of weighting. My other semiconductor names, Lam Research LRCX, Nvidia NVDA and ON Semi ON are numbers 13, 15 and 16, respectively. Those positions since re-entry are up 54%, 40% and 4% in that order. Yes, ON is relatively new to the book. ​

​Readers will see that AMD broke out of an inverse head-and-shoulders pattern with a neckline or pivot point of $123. The stock had retaken its 50-day SMA and 21-day EMA back in late April and has taken a ride atop its 21-day EMA ever since, finally taking its 200-day SMA in mid-June. That forced professional money to increase long-side exposure in response which is very visible on this chart. We had given readers a $147 target in mid-June. The stock peaked at $147.75 on June 27. Hopefully investors took at least a token profit at that time.

Now, the shares appear to have come close to testing the 21-day EMA from above for the first time since June 13. Should there be no retest, the new pivot becomes the recent high of $147.75 (I'll just use $148). The more important line on the way down, should the 21-day EMA fail will be the 200-day SMA. That infusion of capital that forced the run from June 16 to June 27 would likely have to be pulled back out of the stock should that happen.

My Current Plan for AMD

Target Price: $170 (not a street-high)

Pivot: $148

Add: Between 21-day EMA and 200-day SMA

Panic: Loss of 50-day SMA

At the time of publication, Guilfoyle was long AMD, NVDA, ON and LRCX equity.