Advanced Micro Devices, Inc. (AMD) sold off more than 4% on Tuesday after agreeing to buy Xilinx, Inc. (XLNX) for $35 billion in an all-stock transaction expected to close by the end of 2021. The news overshadowed a bullish third quarter 2020 earnings report, with the chipmaker posting a profit of $0.41 per share, beating estimates by $0.10. Revenue rose a hefty 55% year over year to $1.8 billion, more than $200 million above consensus.

Key Takeaways

  • AMD shareholders hit the exits after the company said that it would buy Xilinx in an all-stock transaction.
  • The selloff relinquished gains posted by AMD following a weak earnings report from Intel Corporation (INTC).
  • A breakdown through support near $80 could trigger a swift decline into the mid-$60s.

The acquisition will expand the company's high-performance computing space portfolio, but the reaction may indicate that AMD paid too much for a company that has underperformed the sector throughout 2020. Xilinx holds a $30.5 billion market cap after yesterday's 8.6% post-news advance and is poorly rated by Wall Street, with a consensus "Hold" rating that foresees a mixed long-term outlook. A secondary offering will be needed to cover the purchase, adding at least 250 million shares to the current 1.17 billion shares now outstanding.

AMD has lifted to an all-time high this year in reaction to systemic delays and mismanagement at Dow component and rival Intel. The stock topped out in September and entered an intermediate correction that relinquished about 20% of its value before a modest bounce into October. Investors were hoping that last week's dreary Intel earnings report would power a rally for AMD back to the high, but those gains have now faded and the stock is testing last month's low.

Barclay's upgraded AMD to "Overweight" after the news, but Wall Street has grown more cautious about the long-term outlook in recent months, with a "Moderate Buy" consensus based upon 13 "Buy" and 10 "Hold" recommendations. One analyst now recommends that shareholders take profits and move to the sidelines. Price targets currently range from low of $62 to a Street-high $120, while AMD is trading about $10 below the median target.

Market capitalization is the aggregate market value of a company represented in a dollar amount. Since it represents the "market" value of a company, it is computed based on the current market price of its shares and the total number of outstanding shares. It is commonly referred to as "market cap," where "cap" represents capitalization – a financial term used for indicating the size of the company.

Advanced Micro Devices Daily Chart (2018 – 2020)

Chart showing the share price performance of Advanced Micro Devices, Inc. (AMD)
TradingView.com

AMD stock finally completed a round trip into the 2000 high in the upper $40s in January 2020 and broke out, grinding sideways at new support for six months before ejecting into a strong uptrend that completed an Elliott impulse wave set in September. It pulled back to the 50-day exponential moving average (EMA) a few weeks later and tested that level before a modest bounce recouped about two-thirds of the prior decline. It rolled over about three-weeks ago and is now testing support for the second time.

The on-balance volume (OBV) accumulation-distribution indicator posted a new high in August, about four weeks ahead of price, and eased into a distribution wave that posted a two-month low in September. It bounced with price into October but has reversed once again, favoring a test at the prior low (red line). This level will offer directional clues in coming sessions if it bounces or breaks down ahead of price.

Bulls are still in charge, but they need to make a stand right here to set up a more dynamic recovery effort. Time is running out because long-term relative strength readings are nearing sell signals that could persist well into the first quarter of 2021. The 50-day EMA at $80 is the obvious inflection point in this conflict, with a breakdown exposing downside into the 200-day EMA in the mid-$60s.

An impulse wave pattern is a technical trading term that describes a strong move in a financial asset's price coinciding with the main direction of the underlying trend. It is used frequently in discussion of the Elliott Wave theory, a method for analyzing and predicting financial market price movements.

The Bottom Line

AMD stock is testing intermediate support for the second time since September after acquisition news triggered a selloff. The stock needs to hold this level or risk another 15 points of short-term downside.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.