Semiconductors are a curious case for the market. The group has enjoyed a long cycle of demand and grown at an incredible pace. However, investors remain concerned about a ‘peak’ cycle in the group. This is a concept that argues, that while sales are fantastic, they are not sustainable.

Price action in the group suggests that theory is winning the day. The Van Eck Semiconductor ETF (SMH) has been under some heavy redistribution since its late-March peak. It is down 21% and is hitting fresh 11-month lows.

The group is seeing some improvement in its Relative Strength line compared to the S&P which has piqued our interest.

May is seasonally the best performing month for Semis. It closed higher 75% of the time with an average return of approximately 3% over the last 20 years. Semis have outperformed the SPY 70% of the time in May by an average of +2%.

After a difficult April, will investors move back into this seasonal pattern? We wanted to look at Advanced Micro Devices (AMD) as a case study.

The company reported an impressive round of results and helps provide some insight into the space.

The best performing months for semis are February, May, and November. This is notable as they are all post-earning months. The price action is certainly boosted by steady reports.

AMD posted Q1 earnings per share of $1.13, $0.20 better than street expectations. Revenues increased 71% year/year to $5.89 billion, also better than expectations.

The revenue growth was an acceleration from 49% in Q4, but it included six weeks of contribution from its Xilinx (XLNX) acquisition. This was the first quarter where XLNX results were included.  Growth would have still been an impressive 55% excluding XLNX.

AMD has grown revenue by over 45% in seven straight quarters and increased net income by more than 60% for the past 10 quarters.

Based on the higher organic revenue growth, the addition of XLNX, and strong demand across multiple end markets, AMD guided Q2 revenue at the high end of expectations. AMD projects Q2 revenues in the range of $6.3-6.7 billion compared to the $6.36 billion consensus.

It expects FY22 revenues to increase 60% to $26.3 billion which includes the Xilinx acquisition. The prior guidance was an increase of +31% sans Xilinx. The organic outlook projections were increased to the mid-30s growth rate.

This outlook may be considered conservative as the company is pricing in further weakness in the PC market. AMD forecast a high single-digit decline in that area.

Pricing power was on display as Gross Margins expanded by 660 basis points to 53%. This was driven by higher server processor revenue and higher margin XLNX revs. Core GM did increase 480 bps on a standalone basis.

The price action in AMD has been mixed/choppy. We do have the backdrop of the Fed which makes it difficult to understand market participant perceptions.

Shares of AMD rallied from $91 to the $98 area in immediate reaction. The stock would give up some of these gains at the beginning of Wednesday’s trade. It settled back around $92 and then saw another boost back to $99 as a broad market, Post-Fed rally lifted all boats. That move is under pressure to kick off Thursday’s trade.

The choppy action is indicative of the overall markets. We would like to see some of the macro backdrop settle so we can get a fair idea of price discovery in AMD. That may take a few more weeks.

Here are the basics we need to understand regarding AMD:

  • Revenue growth is a key driver and shows no signs of abating.
  • The stock trades at forward earnings of 21x which is very reasonable for a company growing top line by 60% and expanding margins by 600+ bps.
  • Shares are down 31% YTD
  • $80-90 is significant support as the stock consolidated in this range from August 2020 through June 2021.

It may be a little early to build a big position in this name but there is enough support below and there has been enough damage done to this chart to suggest a bottom is closer.  This is one of the best semiconductor plays in the market. If we see the group recover and enjoy another seasonally strong performance then AMD is a stock you should have on your shopping list.