Fed Day, BOJ Makes a Move, Semis Smackdown, Trading AMD, New Targets
As we get ready for the Powell and the FOMC, let's discuss the Bank of Japan move, the U.S. dollar, AMD earnings in depth, and of course the reaction to Microsoft's results.
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Rise and shine! Happy FOMC Wednesday to all who celebrate!
Particularly sharp readers may have noticed that the U.S. Dollar Index has already given back gains made earlier this week. Those readers have also likely noticed that the same U.S. dollar, which purchased more 153 yen a few hours ago, now as I write through the zero-dark hours, can only purchase a little more than 150 yen.
On Wednesday morning (very late Tuesday evening in the U.S.), the Bank of Japan's policy committee by a vote of 7 to 2, decided to increase its overnight "policy" rate to 0.25%, which is the highest that this rate has been since the year 2008.
The BOJ had ended its negative interest rate policy back in March ahead of this move as financial conditions have changed in Japan. There had been pressure from senior government officials as core consumer-level inflation has now run above the BOJ's 2% target for 27 consecutive months after decades of what would be seen as a deflationary environment. In addition to core inflation that recently printed at 2.6% year over year for June, the Japanese economy has been mired in a state of contraction for four consecutive quarters as the debased Japanese yen has damaged standards of living and consumer spending in that nation.
In addition, the BOJ laid out the framework to reduce its quantitative easing program (yes, the BOJ was still doing QE) from its current purchases of Y6T ($39B) worth of bonds per month to half that much. BOJ Governor Kazuo Ueda commented, "We plan to continue raising our policy rate and adjust the degree of monetary accommodation."
Tightening policy with the economy in the hole? My opinion? The Bank of Japan had to choose its poison, and ultra-loose monetary policy had long ago stopped working its magic. The pain of potentially accelerating that economy's decline through tighter monetary policy apparently scares the BOJ less than does the continued decline of the economy through the diminished purchasing power of the Japanese yen. There is unfortunately no obvious path I see for now for the Japanese economy to avoid experiencing a continuance of its current state of financial pain.
Of Course...
This move made by the Bank of Japan came just hours ahead of Wednesday afternoon's FOMC policy statement and accompanying press conference to be hosted by Fed Chair Jerome Powell. The Fed is expected to lay the groundwork for a change in trajectory for U.S. monetary policy from tighter or higher for longer, to an easier stance.
The next scheduled policy decision after this one is not until September 18. The Fed will have the economic symposium at Jackson Hole in late August to either reinforce or back away from the idea that there will be a change made in September.
U.S. Stocks
The regular session on Tuesday got a little rough. The rotation that we keep talking about appeared to be back in vogue as the Philadelphia Semiconductor Index gave up 3.88%, the Technology sector SPDR ETF XLK declined 2.51%, the Nasdaq 100 was down 1.38% and the Nasdaq Composite gave back 1.28%. Conversely, the S&P SmallCap 600 gained 0.6%, while the Russell 2000 rose 0.35% and the S&P MidCap 400 moved 0.33% higher.
As the semiconductors led the way lower on Tuesday, Nvidia NVDA, Qualcomm QCOM and Arm Holdings ARM led the semiconductors lower. Those three names suffered beatings of 7.04%, 6.55% and 6%, respectively. This leads us to the wild high-tech earnings releases that impacted after-hours trading on Tuesday evening.
Both Advanced Micro Devices AMD and Microsoft MSFT posted their quarterly numbers after the closing bell Tuesday. Both beat Wall Street's top and bottom-line expectations.
Traders poured out of MSFT at first as numbers for the Intelligent Cloud, and for Azure in particular, appeared to decelerate. The shares were down 8%+ at one point. However, CEO Satya Nadella and CFO Amy Hood did a great job on the conference call and the stock rallied through the night.
As I type out this note, I see MSFT down "just" 2.8% from where it closed last night. I expect to come back to you in a couple of hours with a piece solely devoted to Microsoft.
Advanced Micro Devices
For the second quarter, AMD posted adjusted EPS of $0.69 (GAAP EPS: $0.16) on revenue of $5.835 billion. The adjusted earnings print beat the Street by a penny, and the sales print beat the Street as well, reflecting year-over-year growth of 9%.
Traders loved the AMD release immediately and took the stock higher overnight. As I work through this piece, I see the shares up 9.2% from Tuesday's closing price. Keep in mind that AMD outperformed the group on Tuesday during the regular session and gave up only 0.94%. The adjustments made were made primarily for the purposes of stock-based compensation and the amortization of acquisition-related intangibles.
On a GAAP basis, gross profit increased 17% to $2.864 billion on a gross margin of 49% (up from 46%). Operating expenses increased 5%, leaving operating income of $269 million (up from -$20 million) on an operating margin of 5% (up from 0%). After accounting for taxes and interest, net income printed at $265 million (up from $27 million). This works out to $0.16 per share, up from the year ago comparison of $0.02.
On an adjusted basis, gross profit increased 16% to $3.101 billion on a gross margin of 53% (up from 50%). Operating expenses increased 15%, leaving operating income of $1.264 billion (up 18%) on an operating margin of 22% (up from 20%).
After accounting for taxes and interest, net income printed at $1.126 billion (up from $948 million). This works out to $0.69 per share, up from the year-ago comparison of $0.58.
AMD Sector Performance
-- Data Center generated revenue of $2.834 billion (+115%), producing operating income of $743 million (+405%). These numbers are not misprints and beat expectations handily.
-- Client generated revenue of $1,492 billion (+50%), producing operating income of $89 million (up from -$69 million). This area also beat expectations.
-- Gaming generated revenue of $648 million (-59%), producing operating income of $77 million (-65.8%). Though down big, this segment fell narrowly short of expectations.
-- Embedded generated revenue of $861 million (-41%), producing operating income of $345 million (-54%). Though lower compared to last year, these numbers beat expectations.
AMD Guidance
For the current quarter, the company is projecting revenue generation of $6.7 billion give or take $300 million. At that number, year-over-year growth would come to 16%. Adjusted gross margin is seen at 53.5%.
During the call, CFO Jean Hu added that AMD is expecting continued strength in the Data Center and in Client, while Gaming and Embedded will remain weaker.
The CEO
CEO Dr. Lisa SU commented in the press release... “Our AI business continued accelerating and we are well positioned to deliver strong revenue growth in the second half of the year led by demand for Instinct, EPYC and Ryzen processors. The rapid advances in generative AI are driving demand for more compute in every market, creating significant growth opportunities as we deliver leadership AI solutions across our business.”
AMD Fundamentals
For the quarter reported, AMD drove operating cash flow of $593 million. Out of that number, came capex spending of $154 million, leaving free cash flow of $439 million, up from $254 million for the year-ago comparison. The company did repurchase $352 million worth of common stock during the quarter, but does not pay shareholders a cash dividend.
Glancing at the balance sheet, AMD ended the period with a cash position of $5.34 billion and inventories of $4.991 billion. This puts current assets at $17.465 billion. Current liabilities add up to $6.195 billion, including no short-term debt. These numbers leave AMD with a very muscular current ratio of 2.82 and a quite robust quick ratio of 2.01.
Total assets amount to $67.886 billion. This does include $24.262 billion in goodwill and $20.138 billion in acquisition-related intangibles. Yes, that's a bit much. Think Xilinx. Those Intangibles are going to be bloated for a while. Total assets less equity comes to just $11.348 billion, including long-term debt of $1.719 billion. That's something AMD could pay off out of pocket more than three times over. This is a pristine, fortress-like balance sheet.
AMD on Wall Street
Overnight, I have found eight highly rated (4+ stars at TipRanks) sell-side analysts that have weighed in on AMD. After allowing for changes, there are seven "buy" or buy-equivalent ratings and one "hold" rating. Two of the "buys" did not set price targets, so I have six of those.
The average price target among the six is $197.17 with a high of $220 (John Vinh of KeyBanc) and a low of $180 (Harlan Sur of J.P. Morgan).
My Thoughts
There are parts of AMD that are struggling, but the company is hitting home runs precisely where it needs to. I think the Data Center numbers show that even with Nvidia in the driver's seat as far as supplying AI-driven demand for high-end GPUs, there will be more than enough secondary and tertiary demand for the likes of AMD to do very well for themselves. Oh, and the balance sheet is a work of art. NVDA should rally alongside AMD on this release.
Remember this chart? The cup with handle. The base of consolidation. The inverse head and shoulders. They all produced as we projected and served us well.
Erase it all. Times have changed.
We now have what looks to me to be a still under development descending of falling wedge, which is a pattern of bullish reversal.
The stock's Realtive Strength Index (RSI) and daily Moving Average Convergence Divergence (MACD) have been weak. Both will improve this morning. The stock will likely challenge its own 200-day simple moving average (SMA) this morning.
I have some ideas....
AMD Levels
For now...
Price Target: $185
Pivot: 200-day SMA
Add: Down to wedge support
Panic: New 2024 lows
Bull Case...
Price Target: $210
Pivot: Upper trendline of wedge
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.82%.
07:00 - MBA Mortgage Applications (Weekly): Last -2.2% w/w.
08:15 - ADP Employment Report (July): Expecting 166K, Last 150K.
09:45 - Chicago PMI (July): Expecting 44.1, Last 47.4.
10:00 - Pending Home Sales (June): Expecting 1.6% m/m, Last -2.1% m/m.
10:30 - Oil Inventories (Weekly): Last -3.741M.
10:30 - Gasoline Stocks (Weekly): Last -5.572M.
The Fed & The US Treasury (All Times Eastern)
08:30 - Treasury Refinance Announcement.
14:00 - FOMC Policy Decision.
14:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: MO (1.34), ADP (2.06), BA (-1.79), GEHC (0.98), HUM (5.87), TMUS (2.28)
After the Close: ALB (0.46), ARM (0.35), CTVA (1.72), LRCX (7.59), META (4.78), QCOM (2.26)
At the time of publication, Guilfoyle was long NVDA, AMD, MSFT and NVDA equity.
