Hi friends,

Today I am sharing a tactical setup for short-term trading.

The stock in question is AMD.

I will first share the chart logic for the setup, including the take-profit and stop-loss zone.

But I will also share why I am cautious in the medium term, both in terms of the chart technicals and the business fundamentals.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

1. AMD: the short-term setup

AMD Daily Chart

Click here for the full-size chart.

Having reached the all-time-high of $227 in early March, AMD is now in a corrective territory, down 30% from that ATH mark.

In Elliot Waves Theory, the corrective waves happen in 3 waves: A-B-C. Wave A is the initial leg down. Wave B is a bull-trap bounce with the market getting on the dip. Wave C is capitulation and usually the longest wave, with the market selling every rally.

For AMD, wave circle-A ended at $141, after experiencing a smaller degree A-B-C and 5 waves in the smaller degree C wave.

Now, AMD has made the first attempt to rally higher from the wave circle-A low. This was the beginning of the wave circle-B.

The rally has now pulled back, and looks ready for the final bounce towards the wave circle-B target of $189.

The wave circle-B target is proportionate in length from the June-low, as the initial rally from $141 to $175 in May. A reasonable stop loss is just below the June low of $153.

2. The long-term picture is more mixed

There is a likely Wave C down

AMD Weekly Chart

Click here for the full-size chart.

Zooming out further:

Click here for the full-size chart.

While AMD could have simply bottomed at wave circle-A ($141), a wave C is more likely to come.

This is because AMD has completed the 5 waves from the October 2022 low. A correction down to $141 looks rather shallow (less than 50% retracement of the move).

Wave C points to the $100 region. It is the 1.238 extension of wave circle-A from the projected wave-circle B target we discussed in section 1.

Fundamental analysis: valuation requires growth justification

We can first start comparing AMD with its peers in terms of relative valuation versus growth. The names below are its peers with 100+ billion in market capitalisation.

NVDA, being the hottest player right now, of course displays the fastest growth of 200%+. However, if you look across the field, all of the other businesses are moving backwards except for AVGO (Broadcom) and ARM.

AMD’s revenue has been growing essentially flat.

The valuation of most of the semiconductor names are therefore justified by their forward growth. For AMD, the street sees it accelerating revenue growth at a CAGR of 20% in the next 2 years.

In terms of the bottom line, AMD trades at an expensive forward PE of 40x, nearly on par with NVDA. AMD is expected to grow its EPS at 45% average for the next two years. Relatively speaking, NVDA and INTC are more worth the buck. But AMD is not that bad compared with the other peers.

DCF model finds valuation challenging

I can begin with the caveat that in today’s market, most stocks I’ve analysed have stretched valuations. By that I mean, even putting the bull-case numbers, for revenue growth, operating margins, and free cash flow margins, the discounted cash flows do not match up with the company’s valuation.

However, market can stay stretched for a long time, because a “fair valuation” is only one component of the whole equation. Valuation multiples can rise and fall given the overall liquidity (e.g. level of bank reserves, QE), bond yields, investor sentiment, and availability of opportunities.

For AMD, to get to even the $100 price per share, I need to assume 15-21% top line growth in the next 10 years, a long-term GAAP operating margin of 20% (currently 0%), and a long-term GAAP free cash flow margin of 30% (currently 0.5%).

Some very ambitious stuff.

Bottom line: show me the evidence

The fundamental analysis is not meant to attack the AMD’s long-term prospects. But rather, I want to see evidence of the improving financials.

This includes top line growth actually moving towards 20% in the next year (Q2 is projected to grow at 6%), as well as sustain at that level. Profit margins need to improve as well.

Tools I find useful:

TradingView: I use TradingView for all my chart analysis. It is very fast and simple to play with, including the mobile and desktop apps. Sign up here to get $15 off your new TradingView plan.

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Fastgraphs: I find Fastgraphs very useful in gauging whether a stock is underpriced or overpriced versus the fundamentals. Sign up here to get 25% off using the coupon “AFFILIATE25” at the check out.

A quick word from the author

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— Yimin