Advanced Micro Devices Bullish Reversal Is Still In Play

Key Points

• AMD shares are pulling back following a solid report with tepid guidance. 
• The move should present a buying opportunity that could lead to a full reversal. 
• The long-term outlook remains robust and is supported by AI and demand for embedded technology. 

Advanced Micro Devices NASDAQ: AMD share prices imploded following the Q1 release, but it is not the bearish move it might otherwise be. The move is driven by the guidance, which is tepid and potentially cautious given the environment, but that is the near-term picture. The long-term picture is that the Advanced Micro Devices business is at least stable and stabilizing, with the expectation that growth will resume in the 2nd half.

In that scenario, the 8% pullback in share prices is a buying opportunity consistent with a significant reversal. Assuming the Q2 results are consistent with that outlook, share prices will likely rebound when released, and the market will likely bottom long before. 

A look at the chart puts this opportunity into perspective. The stock is down today but up compared to the lows set last year and trading within a range in which a bottom has formed. That bottom could become a Double-Bottom which is the worst-case scenario, or a Head & Shoulders Bottom, which is what it looks like now. The critical level of support is as low as $63, which raises the question of if this market has already put in its Head & Shoulders and is now confirming, or about to confirm, a reversal that could lead it higher well into 2024. 

The Analysts Like What They See In AMD Results

The analysts' activity following the Q2 release is mixed, but the takeaway is all bullish. Marketbeat.com has picked up 9 new reports, including price target increases, decreases, upgrades and downgrades. The net result is that sentiment is firming at a Moderate Buy, and the price target, which is 20% above the current action, is trending higher compared to last month and last quarter.

The consensus has the stock trading at $100, which is the baseline of the bottom regardless of its nature. That level will provide significant resistance despite many new targets being well above it. If the trend in sentiment is not sustained, the $100 level could cap gains until later in the year, assuming the market will get on board with the outlook. 

The Q1 results are good, and the company has been set up for strength despite the weak guidance. The company brought in $5.35 billion in consolidated revenue for a decline of 9.2% compared to last year, beating the consensus by 75 basis points. Gaming, the company’s core business, fell by 9% but was offset by a 163% increase in embedded and flat sales in Datacenter. Datacenter and Gaming sales are not expected to improve materially for at least a quarter or 2 due to inventory and demand issues but Embedded should remain strong. 

CEO Lisa Su said it all by saying the company is facing a mixed-demand environment. Embedded sales are supported by the auto industry, supporting companies like onsemi NASDAQ: ON and NXP Semiconductors NASDAQ: NXPI. Regarding the guidance, the company expects revenue to range around $5.3 billion compared to the consensus of $5.52 billion, and the margin outlook is also slightly weak. This is weighing on the market but discounts the long-term position once economic activity rebounds and the impact of AI. 

"We are in the very early stages of the AI era," Su said. "This will require significant increases in computer performance. AMD is in a strong position for this opportunity."

The Technical Outlook: Ready To Reverse Or Stuck In A Range?

Shares of AMD are still forming a bullish reversal, but there is a question about its strength. The market is heading lower now and will retest support within the $55 to $85 range; the deeper it goes, the less likely it is to form a complete reversal. In that scenario, this market could become rangebound between $55 and $100 until later in the year.