Here's my 2023 stock pick - and tips that may be more important

Before I get to my “best bet” for the year ahead, I want to put this whole “New Year’s Stock Pick” thing into perspective.

You know the first part: I am going to give you a name in which I am or will be in me. I will keep you updated throughout the year as I manage this position. It 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 catch – and something as important as the choice itself. No one I know sits down and initiates a long position on a name while the calendar is ticking with the intention of holding that name for a year. In fact, what many people may not realize from reading these picks is that seasoned traders use various investment tools such as price targets and panic points – as well as options – for these transactions. These tools give us more control over when we exit a position than just the passage of time. Regular readers know full well that I refuse to lose more than 8% on any position unless it happens while I sleep.

This kind of rule protected me last year when I chose the Walt Disney Company ( SAY). The stock would have been a horror show had one simply bought a few shares and made no attempt to manage the risk. Of course, target prices and panic points can be changed as situations change, but not just at will. If you change levels, I must take action on the original target/panic and have a good reason to make the change. In 2017, when my title of the year was Lam Research ( LRCX), I had to adjust my target price several times to stay long until the end of the year. It was stupid.

Now on to my choice. It’s a name with upside potential through 2023 – but we can not last all year. My commitment is simple: as I manage the position, I will say so publicly. I’ll keep readers updated, either in print with potential lag, or in near real time on Twitter or cable TV.

Without further eloquence…

My Stock of the Year for 2023 is Advanced Micro Devices ( AMD), the now elite-level semiconductor chip designer in Santa Clara, Calif., led by one of the very big CEOs of this generation, Lisa Su.

Since mid-December, we’ve seen a number of sell-side analysts come to the defense of Advanced Micro Devices – so more than they have for other chip names. Morgan Stanley’s Joseph Moore, which is rated five stars by TipRanks, said two weeks ago that AMD “remains the strong performer in large-cap (semiconductors) despite their server roadmap having clearly improved on its worst tech leadership position in the year.” .” AMD is Morgan Stanley’s top chip pick for 2023.

Right after that, Bernstein analyst Stacy Rasgon, who is rated five stars by TipRanks, named the stock one of the top semiconductor picks for 2023. Rasgon grouped AMD with Nvidia ( NVDA) and Qualcomm ( COMQ) as companies that have already cut spending and had “good stories going forward.” It classifies AMD as a “buy” with a target price of $95.

This brings us to Christmas Eve. While half of you were trying to mix the eggnog, UBS’s Timothy Arcuri, who is rated five stars by TipRanks, gave his take on semiconductors as an industry and how it sees AMD, Nvidia and Micron ( MU) as the top chip stocks for 2023. Arcuri, also ranks AMD as a “buy” with a target price of $95.

Earnings

Advanced Micro Devices is expected to release its fourth quarter financial results in late January. Consensus view is adjusted earnings per share of $0.67, range $0.58 to $0.71 on revenue of $5.52 billion in range $5.45 billion dollars to $5.66 billion. This compares to $0.92 for the comparison a year ago and on an annual basis this would represent a growth of 14.4%.

For the full fiscal year 2022, consensus estimates for the fourth quarter should be realized, AMD will have posted adjusted EPS of $3.52 on revenue of $23.52 billion. Those numbers would come at 26% earnings growth on 43% revenue growth. Early expectations for fiscal 2023 are for adjusted EPS of $3.65 on revenue of $24.93 billion. In what has already been, to some extent, seen as a tough year, that would represent 3.7% earnings growth on 6% revenue growth.

For the last reported quarter, AMD posted adjusted EPS of $0.67 on revenue of $5.565 billion. Top and line performance fell short of already low expectations at the time. But adjusted net income rose 23% to $1.095 billion, with revenue good for 29.2% growth. Adjusted gross margin, which was a positive, improved to 50% from 48%, in line with expectations, with adjusted operating margin declining from 24% to 23%.

segments

Games : Third quarter net revenue increased 13.7% to $1.631 billion, generating operating profit of $142 million (-38.5%). The company predicted a lack of future growth for this segment.

Data center: Net revenue increased 45.2% to $1.609 billion, generating operating profit of $505 million (+64%). The company expects continued growth for this segment.

Embedded: Net income printed at $1.303 billion, down from $79 million, generating operating profit of $505 million, down from $23 million. The company expects continued growth for this segment.

Customer: Net revenue decreased 39.6% to $1.022 billion, resulting in an operating loss of $26 million, compared to $490 million in revenue. AMD predicted a lack of future growth for this segment.

The balance sheet

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

This puts current assets at $14.42 billion due to growth in accounts receivable. Current liabilities total $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 quick ratio at 1.65 (even with increased inventory). These ratios are very strong. Not to neglect. AMD is, in my opinion, well prepared to weather the current and future storms.

Total assets stand at $67.811 billion. This included goodwill of $24.187 billion, which at 35.7% of total assets is indeed higher than I like, but certainly not outside of what is normal. Total liabilities less equity is just $13.269 billion, including $2.466 billion of long-term debt. In September, AMD could repay that debt more than twice out of pocket. In short, this balance sheet is in excellent shape.

My minds

Although I remain long AMD, I have come down to less than 20% in terms of shares from where this position was less than a year ago. As I mentioned, posts need to be managed and require regular upkeep. It has been a year in which investors have been forced to trade names like this far more frequently than they have in the past. I go into 2023 expecting more of the same in this regard.

I have great confidence in CEO Lisa Su’s abilities. Yet inventory remains a problem that will take time to resolve. Business spending in data center and digitization, as well as gaming, could be subject to changing national and global macroeconomic conditions. The entire Chinese market is subject to US-Sino relations. I will add that at some point in 2023, while there may be new issues to address, a resolution or at least an increased level of clarity could be brought to the current environment.

For the medium term, AMD remains in the same downtrend as the name since the November 2021 reversal. The US and global economies could worsen at some point in the first half of 2023. Names like- ci suffer during any period of contraction in economic activity.

I think 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. Then, if all goes as expected, AMD have paved the way for an upward acceleration in the share price during the second half, or fourth quarter, of 2023.

My target price for AMD is currently $80. This would require taking and taking the 50-day simple moving average. This would then set the stocks in place for a fight at the 200 day simple moving average. We’ll worry about that, though, after hitting the target. I will run with a short term panic point of $59. Should this level be triggered, I currently see October flows as a landing point for a potential re-entry.

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