AMD Results Are No Reason To Buy Semiconductors... Yet

Key Points

• Advanced Micro Devices beat on the top and bottom lines. 
• Guidance, however, is weak and points to a pullback for the semiconductor business in 2023. 
• Diversification will help the company weather whatever comes. 

Advanced Micro Devices NASDAQ: AMD is moving higher in the wake of the Q4 results and has the entire complex edging higher as well, but this is no reason to buy it or them. As good as they are, the results confirm a top for the business and troubled times for the industry at large. While Q4 results outpaced the consensus estimates and capped off a record-setting year, the gains are largely due to Xilinx's acquisition; strengths were offset by weaknesses, and the guidance isn’t all that rosy.

The good news is that AMD’s diversification strategy has it well-positioned to weather whatever comes in 2023 so it should come out of the slump in even better shape than it is now. 

Advanced Micro Devices Q4 Offset By Guidance 

Advanced Micro Devices had a good quarter but you can chalk it all up to the addition of Xilinx to the fold. The revenue of $5.6 billion is up 15.9% versus last year, but this is due to an 1868% increase in the embedded segment attributed to Xillinx. This has the Embedded segment at 25% of revenue and more than enough to account for the 15.9% of growth.

Of the remaining segments, Datacenter is still strong with a growth of 42% but this is offset by a 15% decline in the Client segment and a 7% decline in Gaming which account for almost  45% of revenue together.

This means for AMD that portfolio diversification will help support business moving forward, but weakness should be expected to continue in the computing and gaming segments. This weakness will impact other companies with heavy exposure to gaming and computing, like Nvidia NASDAQ: NVDA and Intel NASDAQ: INTC as well. 

AMD’s revenue was above the Marketbeat.com consensus, which is good news but the margin of outperformance is slim and coupled with weak guidance. The company expects revenue to come in flat to down -$0.600 billion versus the current quarter, which is a 10% decline sequential and YOY.

This is in line with the analyst expectations, so not much of a catalyst and is coupled with margin contraction. The company’s adjusted margin is contracting on a sequential basis and falling from an average of 52% in F2022 to 51% in Q4 of the year and about 50% in Q1 of 2023 due to the shifting product mix.

This is a slight decline to be sure but it will provide downward pressure on expectations and that is already being seen in the analysts' sentiment. 

The Analyst's Sentiment Is Slipping 

The 32 analysts with current ratings on AMD stock have it pegged at a Moderate Buy with a price target about 25% above the current action, but both the rating and price target are slipping. Marketbeat.com has tracked 5 commentaries so far in the wake of the report, and they include a downgrade, 2 price target decreases and 3 price target increases.

The price target increases sound like good news, but they are all either to levels consistent with the $95.68 consensus price target or lower, and they are not enough to offset the reductions.

The takeaway is that the analysts are providing the kind of support for this stock to break out to new highs and sustain the move. The risk is that sentiment and price targets will continue to slip and undercut any gains made in the near term. 

The Technical Outlook: AMD Might Break Out, But Don’t Bet On It 

Shares of AMD are moving higher in the wake of the Q4 report, but they may not break out to new highs. The action is still below key resistance at the $79.50 level and may be fierce. If the market can get above $79.50 and hold the move, it could continue up to the $100 level, but that is a big if. If not, the stock will likely remain range bound at current levels until the outlook brightens.