Here's My 2023 Stock Pick—And Advice That Perhaps Matters Most

TECHNOLOGY
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Before we get to my “best bet” for next year, I want to put this whole “New Year Stock Picking” thing in perspective.

You know the first part: I will give you a name that I am or will be in myself. I will update you throughout the year as I manage this position. That is a promise. I won’t leave anyone in the dark. As always, we can win, we can lose, but I won’t let you do this alone.

But here’s the problem – and something as important as the choice itself. Nobody I know sits down and goes long on a name while the calendar turns with the intention of holding that name for a year. In fact, what many people may not realize when reading these picks is that experienced traders use a number of investment tools such as price targets and panic points – as well as options – for these trades. These tools give us more control over when we exit a position than the mere passage of time. Regular readers are well aware that I refuse to lose more than 8% on any position unless it happens while I’m sleeping.

These kinds of rules protected me last year when I chose The Walt Disney Company (DIS). The stock would have been a freak show if someone had simply bought a few shares and made no attempt to manage the risk. Of course, both target prices and panic points can be changed as situations change, but not simply at will. When changing a level, I must perform some sort of action on the original target/panic and have a good reason to make the switch. In 2017, when my stock of the year was Lam Research (LRCX), I had to adjust my price target a few times just to hang around too long until the end of the year. That was silly.

Now let’s go to my choice. It is a name with appreciation potential until 2023 – but we can not hold all year. My promise is simple: As I run the office, I will make this public. I’ll keep readers updated, whether it’s in print with a potential delay or in near real-time on Twitter or cable.

No More Eloquence…

My stock of the year for 2023 is Advanced Micro Devices (AMD), the now elite-level semiconductor chip designer out of Santa Clara, California, led by one of the true great CEOs of this generation, Lisa Su.

Since mid-December, we’ve seen several sales analysts defend Advanced Micro Devices – more so than other chip names. Morgan Stanley’s Joseph Moore, rated five stars by TipRanks, said two weeks ago that AMD “remains the worst performing stock in large companies (semiconductors), despite the fact that its server roadmap has demonstrably improved its ranking position. technology leadership throughout the year.” AMD is Morgan Stanley’s top chip pick for 2023.

Shortly thereafter, Bernstein analyst Stacy Rasgon, rated five stars by TipRanks, named the stock one of the top few semiconductor picks for 2023. Rasgon grouped AMD with Nvidia (NVDA) and Qualcomm (QCOM) as companies which already cut esteemed and had “good stories going forward.” She rates AMD a “Buy” with a price target of $95.

This brings us to Christmas Eve. While half of you were trying to mix the eggnog, Timothy Arcuri of UBS, rated five stars by TipRanks, weighed in on semiconductors as an industry and how he sees AMD, Nvidia and Micron (MU) as the top chip stocks for 2023 Arcuri also rates AMD a “Buy” with a price target of $95.

earnings

Advanced Micro Devices is expected to report fourth quarter financial results in late January. The consensus view is adjusted earnings per share of $0.67, within a range of $0.58 to $0.71, on revenue of $5.52 billion, in a range of $5 .45 billion to US$5.66 billion. This compares to $0.92 for the prior year and, on a year-over-year basis, would represent 14.4% growth.

For the full fiscal 2022, if fourth-quarter consensus estimates hold, AMD will have posted adjusted EPS of $3.52 on revenue of $23.52 billion. These numbers would represent 26% profit growth on top of 43% revenue growth. Early expectations for fiscal 2023 are for adjusted earnings per share of $3.65 and revenue of $24.93 billion. In what has to some extent been considered a difficult year, this would represent 3.7% profit growth on top of 6% revenue growth.

For the most recently reported quarter, AMD reported adjusted EPS of $0.67 and revenue of $5.565 billion. Both top and line performance fell short of already reduced expectations at the time. But adjusted net income rose 23% to $1.095 billion as revenue was good for 29.2% growth. Adjusted gross margin, which was a bright spot, improved from 48% to 50%, meeting expectations, as adjusted operating margin fell from 24% to 23%.

Segments

Games: Third-quarter net income increased 13.7% to $1.631 billion, yielding $142 million in operating income (-38.5%). The company projected a lack of growth going forward for this segment.

data center: Net income increased 45.2% to $1.609 billion, producing $505 million in operating income (+64%). The company has projected continued growth going forward for this segment.

Integrated: Net income was $1.303 billion, up from $79 million, producing $505 million in operating income, up from $23 million. The company has projected continued growth going forward for this segment.

Client: Net income decreased 39.6% to $1.022 billion, producing a $26 million operating loss, down from $490 million in revenue. AMD projected a lack of growth going forward for this segment.

the balance sheet

In September, which is the most recent data available, free cash flow creation remained strong during the troubled third quarter. As for the balance sheet, AMD ended the period with net cash of US$ 5.591 billion and inventories of US$ 3.369 billion. This showed a 27% increase in inventories over the last three months, which will have to be watched.

That puts current assets at $14.42 billion due to growth in accounts receivable. Current liabilities add up to US$ 6.691 billion, which is also higher due to the increase in accounts payable. This put the company’s current ratio at 2.16 and the company’s immediate liquidity ratio at 1.65 (even with increased inventories). These proportions are very strong. It must not be ignored. AMD is, in my opinion, well prepared to weather current and future storms.

Total assets add up to US$ 67.811 billion. This included a “goodwill” of $24.187 billion, which at 35.7% of total assets is actually higher than I’d like, but certainly not out of the ordinary. Total liabilities minus equity come to just $13.269 billion, including $2.466 billion in long-term debt. By September, AMD could pay that debt more than twice out of its own pocket. All in all, this swing is in excellent shape.

My thoughts

While I’ve been around AMD for a long time, I’ve dropped below 20% in terms of stock from where this position was less than a year ago. As I mentioned, positions must be managed and need regular maintenance. This was a year where investors were forced to trade names like this much more often than in the past. I enter 2023 expecting more of the same in this regard.

I have a lot of faith in CEO Lisa Su’s abilities. Still, inventories remain a problem that will take time to replenish. Corporate data center and digitization spending, as well as gaming, may be subject to changing domestic and global macroeconomic conditions. The entire Chinese market is subject to Sino-US relations. I will add that sometime in 2023, while there may be new issues to contend with, some resolution or at least a level of greater clarity could be applied to the current environment.

In the medium term, AMD remains in the same downtrend that the name has been in since the November 2021 reversal. The US and world economies could take a turn for the worse sometime in the first half of 2023. Names like this would suffer from any period of contraction of economic activity.

I think that if that name works, a period of technical consolidation will be needed after a potentially sharp move in early 2023. (The closing wedge (dark blue) signals short-term volatility. So, if all goes according to plan, the AMD set the stage for an upward acceleration in stock price in the second half or fourth quarter of 2023.

My price target for AMD is currently $80. This would require taking and holding the 50 day simple moving average. That would put stocks in a fight at the 200-day simple moving average. Let’s worry about that, though, after hitting the target. I will run with a short-term panic point of $59. If this level triggers, I currently see the October flow as a landing point for a possible re-entry.

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