US Tech Stocks Are Under Attack: How to Trade AMD Now
China and the European Commission are bashing tech, and AMD is just one of several US names facing their wrath.
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Hello! DC?
Anyone home? It's been a tough couple of days for some US-based tech stocks. On Sunday, the Financial Times reported that Beijing had introduced new guidelines meant to phase processors made by both Intel INTC and Advanced Micro Devices AMD out of Chinese government computers and servers.
New guidance on government procurement procedures are also being introduced that would move toward replacing Microsoft MSFT Windows and all non-Chinese database software. The moves are being made to force Chinese buyers to choose Chinese tech when making business decisions.
The US government had already placed sanctions on several Chinese companies, in an effort based on national security concerns, to prevent Chinese purchasers from acquiring high-end US technology that might be used for nefarious or military purposes against either the US or US allies. The moves, which are possibly in retaliation for the US moves, are a strengthening of guidelines enacted back in December when China's Ministry of Industry and Information Technology ordered purchasers to use "safe and reliable" providers.
Beijing approved a list of operating systems and processors as "safe and reliable", and all providers making that list are indeed Chinese-based companies, many state-owned.
Then, early on Monday morning, as Bloomberg News and others reported, the European Commission announced that Apple's AAPL and Alphabet's (GOOGL) Google app store rules will be the primary targets of the first investigations under the new Digital Markets Act.
What is also expected to be looked at will be how Apple allegedly makes it more difficult for users to choose alternatives to its Safari internet browser and how Google search results potentially and unfairly give preference to the firm's own services. The European Commission is also said to be targeting new subscription fees for Meta's META Facebook and Instagram social media platforms.
The Bloomberg article implies that the firms could be facing fines of as much as 10% of global revenue or even up to 20% where there are cases of repeated breaches. The Commission also made mention of Amazon's AMZN ranking practices on its marketplace.
Of all of these names mentioned in both stories, I am long three of these names. Microsoft and Amazon are two of those. Both of those stocks were down small in the early going.
The other is a name whose business and CEO I have long championed, and my portfolios have been rewarded for it. That stock is taking more of a beating today and bears some increased scrutiny on my behalf.
Numbers
The stock of Advanced Micro Devices AMD is getting hit on the China news. The stock, which has struggled of late, remains my second largest allocation among my long positions. That said, AMD is further behind my largest holding- Microsoft - than it used to be and is within a whisker of falling into fourth place as CrowdStrike CRWD rallied earlier this year and has based since and Lockheed Martin LMT has been rallying methodically since mid-February.
AMD has been one of the darlings of the revolution in generative AI, considered by many to be the one challenger to Nvidia NVDA that might actually be able to take some (maybe not much, but some) market share. Still, AMD went into the weekend trading at 53 times forward earnings, up from 17 times at year's end 2022 and just shy of 13 times sales (up from 4 times at year end 2022) and five times book (up from less than 2 times at year end 2022).
The current AI-capable GPU champ, Nvidia trades at 39 times forward looking earnings, down (yes, down) from 45 times at year's end 2022. NVDA trades at 38 times sales and 55 times book (up from 17 times and 22 times respectively at year end 2022). So, in some respects and not others, AMD's valuation has grown disproportionately to Nvidia's despite Nvidia's much more successful start to the AI-focused era.
AMD is set to report the firm's first quarter financial results on May 1st. Wall Street is looking for an adjusted EPS of $0.55 to $0.60 within a range of $0.52 to $0.64 on revenue of $5B or so within a range of $4.9B to $5.25B. This would compare to unadjusted $0.60 on $5.35B for the year ago comps.
That doesn't sound so great. Nvidia is potentially looking at earnings growth of perhaps 415% on revenue growth of 240%. Unless some significant surprises are on the way, that does not sound like closing the gap to me.
Losing Contact
Readers will see that AMD came out of a cup with handle pattern and broke above pivot in January. The stock, then based, which is normal. However, since AMD's early March apex, the stock has obviously been pricing in something unwelcome. Over the past week or so, AMD battled with its own 50-day SMA (simple moving average). The level has been pierced but AMD had not yet broken contact, which matters.
That could change today. Should AMD break contact with its 50-day SMA, there are risk managers on Wall Street who will force their portfolio managers to reduce long-side exposure.
The stock enters the week, with a neutral to weaker than neutral reading for Relative Strength and a daily MACD (moving average convergence divergence) with the 12-day EMA (exponential moving average) mired below the 26-day EMA and the histogram of the 9-day EMA deeply negative.
In short, I'm telling you that if AMD fails to at least touch its 50-day SMA today (Monday), I will be forced by my own set of core disciplines to take some profits in the name.
Not the worst thing in the world. At least there are profits and at least they are large. In fact, in percentage terms, my unrealized profit in AMD is second on my book, only to NVDA. I'll live, and so will those in a similar situation. Am I going to liquidate AMD? Not a chance. Just potentially taking a few chips off of the table. Rock on.
At the time of publication, Stephen Guilfoyle was long AMD, MSFT, AMZ, CRWD, LMT equity.
