Key Insights

• Advanced Micro Devices, Inc. (AMD) has experienced a remarkable bounce-back since October 2022 lows and is currently showing promising signs of surpassing critical thresholds for further growth.
• The breakout of the Philadelphia Semiconductor Index (SOX) from the inverted head and shoulders pattern is a positive indicator of growth in the semiconductor industry.
• The appearance of the inverted head and shoulder patterns, with a critical level of $103, suggests that breaching this level could trigger a price surge, leading to significantly higher levels.
• AMD products are expected to experience a surge in demand soon, owing to the recent expansion of the GPU and CPU markets.

 

Introduction

Advanced Micro Devices, Inc. (AMD) has experienced a remarkable recovery from October 2022 lows and appears poised to surpass critical thresholds for further gains.

This surge in AMD’s stock price is a direct result of the company’s robust profitability, driven by high-performance products in the CPU and GPU markets, as well as recent advancements in Artificial Intelligence (AI). The confirmation of a bottom in the Philadelphia Semiconductor Index (SOX) suggests a positive trend for the semiconductor industry as a whole. This article offers an overview of AMD’s recent growth and competitive advantages, along with a fundamental and technical evaluation to forecast potential long-term trends in AMD’s stock price.

Currently, the stock price of AMD is correcting from the crucial level of $103, a successful breakout beyond this point would pave the way for even higher prices. Since SOX has already experienced a breakout, this suggests that a breakout for AMD may be imminent. Although a recession could negatively impact AMD’s stock price, the company’s strong position and recent success in the AI and gaming industries, as well as its ongoing innovation, suggest that AMD can weather any downturn and maintain its dominant position in the market.

Growth of the Semiconductor Industry

According to a report from the Semiconductor Industry Association (SIA), global sales for the semiconductor industry are expected to decline in 2023. However, the development in AI and GPU markets is driving up demand for semiconductors. The current state of the semiconductor industry is assessed by looking at the SOX, which has rebounded from October 2022 lows and has broken the inverted head and shoulders pattern.

The breakout from the neckline at 3,150 on the SOX is considered a positive sign for the entire semiconductor industry. This breakout suggests an increase in demand for semiconductors, positive earnings, and improving industry conditions. The RSI has produced a double bottom and is currently trading above the mid-level 50, indicating a strong rally in the index. Furthermore, the chart indicates that the index is bouncing back from a robust long-term support level, which has previously resulted in significant rallies in 2016, 2019, and 2020.

The rise in the SOX suggests that investors are optimistic about the prospects of individual companies in the index, therefore, the positive developments in the SOX are expected to have a favorable impact on AMD.

The fact that the SOX has also shown an inverted head and shoulder pattern, followed by a breakout, suggests that a similar breakout for AMD may be on the horizon.On the other hand, the PPI for the semiconductor and other electronic component manufacturing industries is declining in 2023, as shown in the chart below.

As a semiconductor and electronic component manufacturer, AMD’s production costs are influenced by changes in the prices of raw materials that are used in the manufacturing process. A decrease in the PPI leads to lower production costs for AMD and increases the profit margin.

In my view, the heightened demand in the AI and GPU markets will enable AMD to manufacture its products at a lower cost, which is likely to have a positive impact on the company’s profitability.

As per the data presented in the chart below, the Advance Real Retail and Food Services Sales indicate that consumer spending has remained steady in the face of persistent market uncertainty. The sales figures for February 2023 reached $231 billion, underscoring the strength of consumer spending.

The strong sales figure is a positive sign for AMD, as it leads to increased demand for the company’s products, which can boost revenue and earnings. As a result, this potentially leads to a favorable effect on AMD’s stock price, with investors growing more positive about the financial outlook.

Competitive Advantage

AMD’s stock price has rebounded impressively by 87.70% from October 2022 lows of $54.57 to reach March 2023 highs of $102.43. In comparison, Nvidia Corporation (NVDA) has recovered by 157%. This upswing in both companies’ stock prices is attributed to the buzz surrounding the ChatGPT, which is trained on NVDA’s A100 GPU. While AMD has an excellent GPU offering, its stock price recovery has been less impressive than NVDA’s.

However, AMD has launched the MI250 accelerator, which utilizes the world’s most powerful HPC and AI data center GPUs to speed up the process of scientific discovery. Additionally, AMD’s MI300 has been chosen to power the world’s fastest supercomputers by late 2023, indicating that the market may shift towards AMD’s dominant GPUs and lead to an increase in demand for AMD products, thereby reflecting in the stock price.

Moreover, AMD is collaborating with large cloud providers to leverage the power of MI300 for the future of AI, indicating potential revenue growth in 2023 and beyond. These collaborations will significantly impact AMD’s profitability. Microsoft (MSFT) has already adopted AMD’s MI200 for AI purposes, which is reported to be five times more efficient than NVDA’s A100 GPUs. Furthermore, MSFT has been utilizing AMD’s MI250 since 2022.

Currently, Intel Corporation (INTC) holds the largest market share in the GPU market worldwide, with 71%, followed by NVDA at 17%, and AMD at 12%. While AMD lags behind its competitors in the AI sector, the company’s new advancements and releases are outperforming the industry, particularly in the Accelerated Processing Unit (APU) sector.

Although the semiconductor industry is highly competitive and in high demand, the significant discounts of 10% to 40% on AMD’s legacy cards may appeal to price-sensitive consumers, potentially resulting in an increase in sales and revenue for the company. Moreover, The expanded partnership between AMD and Samsung in the mobile GPU market presents a potential for generating new revenue opportunities for AMD, as there is still untapped potential for integrating AMD’s RDNA GPU architecture into Samsung’s Exynos SoCs.

Current Financial Position

Over the past three years, AMD has experienced strong revenue growth, reaching a total revenue of $23.60 billion in 2022, as depicted in the chart below. This growth has been accompanied by a linear increase in gross profit over the past five years, with the current gross profit at $12.05 billion in 2022. The success of AMD’s profitability is attributed to the delivery of high-performance products in the gaming and data center markets, collaborations with industry giants like MSFT, Amazon Inc. AMZN, and Alphabet Inc. GOOG, as well as the recent growth in the AI industry.

Despite a weak PC environment in the second half of 2022, it was a strong year for AMD, owing to the accelerated data center momentum and the strategic acquisition of Xilinx, which diversified the company’s financial model. The year 2022 demonstrated an outstanding performance with revenue growth of 44% over 2021, indicating potential future growth in 2023.

Although AMD’s gross margin was 45%, which is a 3% decrease from 2021, this was due to the amortization of intangible assets associated with the Xilinx acquisition, which also impacted the operating income, bringing it down to $1.26 billion compared to $3.65 billion in 2021.

AMD Revenue growth (seekingalpha.com)

The annual growth for AMD is seen in the table below, which presents strong financial results as compared to the previous year. The operating margin and net income have decreased by 17pp and 58%, respectively, due to increased expenses in research and development and heightened competition in the semiconductor industry. AMD’s increased expenses in R&D in 2022 are $2.85 billion, compared to $1.98 billion in 2021. This has a favorable effect on the company’s long-term profitability.

On the other hand, the improvement in all non-GAAP metrics for 2022 suggests that AMD has successfully managed its expenses and generated profits on an adjusted basis. This indicates that the company makes strategic investments and prioritizes spending in areas that drive future growth. In summary, while the mixed results between GAAP and non-GAAP metrics suggest that AMD is facing some short-term challenges, the company is well-positioned for long-term growth due to its expenses in research and development and future demand for GPUs.

I believe that AMD’s revenue is on track to surpass $35 within the next five years, based on the current growth patterns and the recent acquisition of Xilinx. According to the chart below, AMD’s current PS ratio is 6.16, and its PE ratio is 105.08. Notably, the PE ratio has increased by more than 180% since hitting a low of 37.47 in December 2022. The ratio has been above 30 for quite a long time and it indicates that AMD has growth potential. This suggests that the market is increasingly optimistic about AMD’s future earnings potential or that the company is undervalued.

Overall, it can be concluded that AMD is currently outperforming the market, as evidenced by its significantly higher total revenue in 2022 compared to 2021, while its competitors, NVDA and Intel, saw a slight dip in revenue compared to the previous year. The optimistic outlook for the semiconductor industry is expected to positively affect AMD’s revenue, which could potentially result in a boost to the company’s stock price. AMD’s data center segment is expected to be the primary driver of this growth, as it was the best-performing segment last year. The data center market is projected to experience a CAGR of 11%, with a total value of $517 billion by 2030.

Bullish Price Structure for AMD

Heavy Volatile Bars

The fundamental outlook for AMD is strongly bullish, and this is reflected in the technical outlook, which presents a bullish price structure with high levels of volatility. The yearly chart of AMD reveals three intervals of high volatility. The majority of this volatility occurred during 2019, 2020, and 2021, with a significant correction in 2022. In 2019, the price increased by 154.64% from the opening level of $18.01 to the closing level of $45.86.

However, the price increases in 2020 and 2021 were even higher, with a 95.71% and 56.23% increase in prices, respectively. The year 2019 saw AMD’s stock price experience a remarkable surge, which was largely attributed to the company’s launch of updated versions of the Ryzen desktop processor.

These updates received widespread acclaim for excellent quality and affordability, leading to a substantial increase in sales. The significant sales figures and innovative product offerings from AMD in 2020 also established a solid foundation for the company’s profitability. Additionally, the demand for gaming was further bolstered in 2020 and 2021 as consumers spent more time at home due to the Covid-19 pandemic. This surge in demand for AMD’s products contributed to a significant increase in the company’s stock price during these years.

The significant increase in prices in 2021 suggests substantial volatility, which lead to a significant correction. The appearance of a wick on the 2021 candle indicated a decline that has already been reflected in the price. Currently, the AMD stock price is rebounding from strong support and testing key areas for further upward movement.

The Key for Upside Breakout

The quarterly chart below suggests that the market correction from the all-time highs of $164.46 is likely to be complete, and AMD is on its way to much higher prices if it breaks through key levels. These levels can be observed on the chart using Fibonacci retracement levels.

The price has corrected with a 61.8% retracement of the 2015 lows of $1.61 to the all-time high of $164.46. The price was unable to close below the 61.8% retracement level quarterly, and instead, it rallied toward the key level of $103, which is considered significant due to the 38.2% retracement level of the move. The 61.8% retracement level is considered a long-term support level for long-term investors, and if prices break above $103, it will open the door for much higher prices in AMD stocks.

The 61.8% retracement in 2022 was caused by significant market volatility, but despite this, AMD’s total revenue for the year remained strong. This indicates that the company is in a favorable position to continue its primary long-term bullish trend.

The weekly outlook for AMD also supports a strongly bullish outlook, with key levels identified in the chart below. The emergence of an inverted head and shoulders pattern with the neckline at $103 confirms this bullish outlook. A break above $103 would confirm a breakout and target a price of $125.

Another bullish perspective from this weekly chart is the appearance of a descending broadening wedge, indicated by red dotted lines. The price broke out of the wedge in January 2023 and is currently trading to go higher. A break above the $103 level would target the $125 level, which is where the wedge began to emerge. The appearance of a descending broadening wedge also denotes a phase of heightened volatility and uncertainty. However, the high volatility is likely to result in higher prices due to the emergence of a bullish price structure and strong demand in the GPU and CPU market.

What Investors should do?

To evaluate the entry points for long-term investors, a short-term chart is utilized. The daily chart below shows the emergence of a double bottom pattern at $54.57 and $60.05. This pattern was confirmed with a break above $78, and the price is currently testing the strong resistance level of $103, which was identified as a key level based on the Fibonacci 38.2% retracement level discussed earlier.

A weekly close above $103 would signify a strong bullish signal and pave the way for further upside potential. Investors can consider buying at levels above this key level after a weekly close. Additionally, any pullback towards the $78-$83 region should be viewed as a strong buying opportunity for long-term investors, with $83 being a key consideration due to the 50% retracement level. If the price surpasses $103, the initial objective for this development in AMD would be to reach $125.

Bottom line

In conclusion, AMD has demonstrated a strong recovery in the stock price, driven by profitability, delivery of high-performance products, and recent advancements in AI. The company’s collaboration with large cloud providers and the launch of the MI250 and MI300 accelerator suggest potential revenue growth in 2023 and beyond. Although the PC market is dominated by Intel, AMD’s APU has the potential to outperform its competitors in the future. From a technical standpoint, AMD has completed its correction at the 61.8% retracement level and is currently trading at a key level, where a breakout beyond $103 could trigger further bullish momentum in the company’s stock price. Given the emergence of a double bottom and inverted head and shoulders pattern, an upside breakout from the $103 level appears likely. The recent breakout in the SOX, signaling a positive trend in the semiconductor industry, is an early indication of a potential breakout in AMD prices. Although an economic recession may adversely affect AMD’s stock price, the company’s recent accomplishments and ongoing technological advancements indicate that AMD can sustain its leading position in the market during the recession. Investors may consider buying the stock upon a breakout beyond $103 or at the support level of $78-$83 in case of a price correction.