AI and Semiconductor boom: A look at AMD and ARM's Trajectory

Semiconductor stocks have recently garnered significant interest from our clients, as developments in AI continue to unfold in real time. While NVIDIA and TSMC often grab the headlines, this brief turns the spotlight on AMD and ARM, two notable stocks worthy of attention. This analysis examines the technical trends, price drivers, and future trajectory for these stocks.

AMD

Advanced Micro Devices, Inc. (AMD) is a global semiconductor company. Within the global semiconductor industry, it offers x86 microprocessors, either as standalone devices or incorporated into accelerated processing units for commercial and consumer markets. AMD devices are used in mobile personal computers (PCs), tablets, professional workstations, servers and graphics and multimedia products.

Technical Insights and Price Targets

AMD has a pivot point potentially at $163.31 for a reversal to an upward trend. The alternative scenario is price goes below the $162.50 pivot with a potential pull to the Support at $149.97.

Moreover, AMD is trading above both its 20- and 50-day MA at 173.8550 and $156.4430 respectively with a price Resistance is at $184.9050. The RSI is above the 50 with the MACD below its signal line, and positive. There is a probability the stock could retrace in the short term.

AMD could potentially rise to the $198.00 – $214.20 range with a current bullish consensus Price Target of $193. Base case assumptions are of further share gains for AMD in server compute and notebook continue to drive growth, further supported by a strengthening AI story and a 1 year forward FY2025 EPS of $4.21.

Medium-term Bull Bear Scenarios

Bull consensus: Bull case assumes further execution for AMD. In computing and graphics, AMD continues to gain material market share, while both CPU and GPU markets remain healthier than forecasted. Their server business re-accelerates and grows faster than forecasted, culminating in a bull case FY2025 estimate of $5.03 EPS on a 50x multiple with a price target of $252.00.

Bear consensus: The bear case assumes AMD loses momentum as Intel regains its footing with early success in server due to Granite Rapids. The multiple compresses to 30x as they are unable to drive meaningful revenues in AI markets beyond 2024 resulting in a FY2025 estimate of $3.84 EPS and a target price of $115.00.

Catalyst To Upside

• PC and Zen server share gain accelerates as Zen adoption picks up; Intel's competitive response is less impressive than expected.

• Server refresh drives data centre revenue above expectations.

• MI300X outperforms expectations.

Downside Risk

• Intel's server CPUs in 2024 and 2025 stifle AMD's momentum and allow it to regain share.

• AMD loses graphics share to NVIDIA.

• MI300X underperforms expectations.

ARM HOLDINGS

ARM is a leading semiconductor IP provider specialising in the licensing of CPU cores for the use in advanced digital chips. Its low power, high performance designs are optimised for use in mobile, cloud infrastructure, and IoT as well as the emerging compute in vehicles. ARM also licenses designs for neural processing capabilities (NPUs), graphics cores (via its Mali products) and offers custom system-on-chip (SOC) services as well. The company also provides technical support and training services. ARM has headquarters in Cambridge, UK as well as its North American base in San Jose. It employs almost 6,000 people worldwide and was set up in the 1980s as a spin out of Acorn computers and was originally named Advanced RISC Machines (or ARM for short).

Technical Insights and Price Targets

ARM Holdings has a pivot point at $118.1125 with potential a reversal continuing its upward trend. The alternative scenario is price goes below the $118.1125 level with a potential pull to the $72.28 Support.

ARM is relatively extended and trading well above both its 20- and 50-day MA at 100.1852 and $83.2704 respectively with a price Resistance is at $163.9450. The RSI is above the 50, closer to the overbought level at ~67% with the MACD above its signal line in as strong momentum and positive. The stock is consolidating in the short term with a probability for a short-term reversal.

ARM consensus price range of $55.40 – $140 with a current bearish Price Target of $107. Base case assumptions model ARM’s non-GAAP EBIT margin to pass c.51% in FY26e, giving EPS of $2.15. Consensus expectation is for revenues to grow with an estimated 22% CAGR to FY26, despite slowing growth in licensing. ARM’ s business model and dominant market position combined with structural growth opportunities (AI and autos) could suggest the stock deserves a valuation premium to peers.

Medium-term Bull Bear Scenarios

Bull consensus: ARM could see better than modelled gains, especially in the infrastructure segment, driven by AI and general cloud growth, as well as a more uniform transition to higher royalty rates (shift to v9 architecture) than modelled with key customers (esp. in autos, smartphones) all shifting to 5%+ rates. This would all drive higher royalties’ growth and could see adjusted EBIT pass 60% by FY26e. This could see its FY2026e EPS reach $4, a 50x multiple then takes the shares to $200. In this scenario AI & higher rates drive and creating an inflection; the EPS nears $4 with a Consensus Target Price of $200.00.

Bear consensus: Key downside risks include (i) weaker royalty rates in key end markets, (ii) the business impact from an unfavourable litigation outcome, (iii) loss of share to competitors in growing end markets and (iv) the possibility that geopolitical issues limit global reach longer term. As such the FY26e EPS may reach only c.$1.5 as operating leverage fails to push EBIT margins much beyond c.40%. A cycle low c.25x PE multiple would mean a c.$38/share valuation in this bear scenario. Risk factors impact; EPS edges to c.$1.5 with a Consensus Target Price of $38.00.

Catalyst to Upside

• ARM Neoverse and AI-related compute may ramp beyond levels modelled.
• Higher royalty rates in mobile and autos.
• Better cost control beyond than forecast
• Further, long-term partnership commitments with key customers
• New key designs with lead customers

Downside Risk

• New entrant & established competitors
• Reliance on smartphone royalties
• Uncertainty around revenues from ARM China JV
• Outstanding litigation risks

This analysis was prepared on February 20, 2024. Past performance is not an indicator of future performance.

Written by Joseph Baffour-Diawuoh Sales Trader, CMC Markets APAC Joseph Baffour-Diawuoh is a Sales Trader at CMC Markets with 15 years of industry experience. His journey began at Newmont, the world's largest gold mining company, where he honed his analysis and project management skills before moving into wealth and asset management. Joseph has a diverse background in fintech, consulting and advisory with experience across Australia, Europe, North America, and Africa. Prior to joining CMC Markets, Joseph worked as an Equities Advisor managing portfolios for HNW, sophisticated and family office clients here in Australia. At CMC Markets, his focus on trade execution, research, and education guarantees top-tier service and support for premium clients.