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Last month, Advanced Micro Devices, Inc. (NASDAQ:AMD) It was about to break out of a prolonged downtrend. Then it and the vast majority of semiconductor and AI-related stocks suffered a prolonged period of decline that It culminated in early August. As it turns out, AMD also hit the bottom of the trading range when the market hit its recent low. Since then, like many other pairs, it has appreciated substantially. I think it is entirely likely that AMD will retest the top of this recent trading range and potentially break out to the upside this time.
Recent acquisition
Earlier this week, AMD reported which will acquire ZT Systems, an AI infrastructure provider, in a cash and stock transaction valued at approximately $4.9 billion. The transaction also includes a contingent payment that may reach $400 million, based on achieving certain post-closing milestones.
The acquisition will help AMD expand its data center and AI systems capabilities, and provide AMD with additional existing AI revenue from its operations. ZT Systems also owns a domestic data center infrastructure manufacturing business that AMD intends to divest once it finds a strategic partner. The acquisition is expected to close in the first half of 2025.
AMD CEO Lisa Su noted that
“The combination of our high-performance Instinct AI accelerator, EPYC CPU and networking product portfolios with ZT Systems’ industry-leading data center systems expertise will enable AMD to deliver end-to-end data center AI infrastructure at scale with our ecosystem of OEM and ODM partners.”
Q2 2024 Earnings
At the end of July, AMD reported Second quarter 2024 earnings beat estimates due to multiple factors, including record revenue from the data center segment. AMD's second quarter revenue came in at $5.84 billion, beating consensus estimates by about $120 million, and non-GAAP earnings of $0.69 per share were slightly better than the $0.68 estimate.
As part of her earnings, AMD CEO Lisa Su commented that
“Our AI business continued to accelerate and we are well positioned to deliver strong revenue growth in the second half of the year, driven by demand for Instinct, EPYC and Ryzen processors.”
Data center revenue growth was approximately 115 percent higher than the same quarter last year. Second-quarter data center revenue reached a record $2.8 billion. In addition, AMD client segment revenue was $1.5 billion, representing a 50 percent increase from the prior year.
Not all segments were as strong. For example, AMD's gaming segment fell 59 percent year-over-year to $648 million. This decline was primarily due to a decline in sales of semi-custom products. In addition, AMD's embedded products segment earned $861 million in revenue, which was a 41 percent drop.
AMD provided guidance for the third quarter of 2024 expecting total revenue of $6.7 billion, which was higher guidance than analyst consensus estimates of approximately $6.6 billion.
There are several reasons to expect AMD to remain competitive in the coming years, including the company's history of keeping up with Intel (INTC) in the personal computing chip market. It now appears that AMD has taken a considerable lead in that race since at least mid-2020, when Intel was forced to announce a delay to its 7nm product due to a process defect. At that point, AMD had already brought a 7nm product to market and has since brought to market a 4nm product.
Even though Intel lagged behind in performance overall, it managed to catch up with its competitor and eventually overtake it. Now, AMD is probably the second horse in the AI chip race, where Nvidia (NVDA) maintains a considerable lead in both technology and market share. It is possible that they will one day catch up with NVDA, or at least take a considerable market share by offering reasonably competitive products at a lower price.
AMD chips are also reasonable competitive For cryptocurrency mining, where its most recent version, the Ryzen 9, is typically among the best-performing options in its price range for solving related algorithms. The competitiveness of AMD’s CPU chips for such specific tasks is unusual, as they are typically handled by GPUs, such as graphics cards, and application-specific integrated circuits (or ASICs), which are essentially specialists designed to perform a single function.
Technicians
AMD’s recent surge since the market bottomed in early August has brought the stock back to the midpoint of its recent trading range, in the mid-$150s. This price also roughly coincides with AMD’s 50-day and 200-day moving averages. This price is likely to provide some level of resistance, but if AMD can break above this level again, it should also act as a level of support.
AMD daily candle chart (Finviz.com)
If it manages to break above $150, it seems likely that the stock will once again attempt to reach the top of the downward trading range it has been stuck in since early spring of this year. The top of the range is around $180 per share, and AMD was there in the first half of July. At that time, it took AMD less than two weeks to move from $150 to over $180.
The same could happen over the next two weeks, or at least the two weeks after AMD manages to break above its 50-day and 200-day moving averages. Again, the stock is basically sitting at those averages, so any continued appreciation could trigger this bullish move.
A potential near-term catalyst could come in the form of analyst revisions based on the acquisition of ZT Systems, as well as AMD’s own recent Q2 performance. This acquisition brings with it existing revenue streams, meaning AMD should almost certainly achieve revenue accretion following the combination of ZT’s business with AMD’s. This should result in increases in AMD’s data center and AI revenue following the completion of the acquisition, with this inorganic growth eventually adding to estimates for the second half of 2025 and beyond.
Risks
The most obvious risks facing AMD are a bounce off this resistance point in the $150 area and a fall back toward the bottom of its trading range, as well as a potential market-wide sell-off that takes most stocks lower. If AMD were to fall below the $140 area, I would lose the conviction for AMD to make a near-term test of the upper end of its trading range.
Another risk is that analysts react poorly to the ZT Systems acquisition, which seems unlikely as the immediate market response was undoubtedly positive. However, a change in analyst sentiment would likely act as an anchor for the stock price and make it difficult for AMD to rally significantly ahead of reporting third-quarter results.
Conclusion
AMD appears to be one of the few stocks that is likely to benefit long-term from the current and ongoing tailwinds from AI and cryptocurrencies. Additionally, AMD is likely to benefit from a potential PC refresh cycle. Despite these likely catalysts, AMD has underperformed since rising into the overbought position this spring, where it briefly hit prices above $200 per share.
Last month, AMD nearly broke out of its multi-month downtrend, before falling back and touching the bottom of its trading range as the market bottomed in early August. Since then, AMD has performed exceptionally well and is now back in the midst of its trading rage, at a price that previously acted as strong support. Any move higher is likely to test the top of this range, at roughly $180 per share. A potential breakout to higher prices is entirely possible if AMD can report solid earnings and raise guidance when it reports Q3 2024 results this fall.