The story for much of the year on Wall Street has been one of downward estimate revisions. A slowing economy, the very real possibility of a recession and consumers’ shrinking spending power in the face of rising inflation have all been reasons for lowering expectations.
And now another downward revision has been added to the increasingly long list - for Advanced Micro Devices (AMD).
Due to near-term headwinds, mostly coming from the direction of the PC market, BMO analyst Ambrish Srivastava has lowered his 2022 and 2023 EPS estimates from the prior $4.40 and $4.90 to $4.30 and $4.68, respectively. Both are now below the Street’s outlook of $4.36 and $4.80.
However, near-term headwinds aside, Srivastava is extremely bullish on all things AMD. In fact, the current problems in the PC market can even be brushed aside, given the promising outlook elsewhere.
“We are hearing of continued momentum from our work around the industry, and see AMD's server share continuing to expand,” the analyst said.
Much has been made of how AMD has managed to close the gap on its once far bigger rival Intel in the CPU market, while it has been astutely managed by CEO Lisa Su. Part of AMD’s success in recent years has resulted from the company taking advantage of Intel’s missteps. Indeed, Srivastava sees a path to “sustained share gains” against Intel but not because of more mistakes on Intel’s part.
“Our sense is that with the several key architectural innovations the company has made, along with rolling out a lineup of products that has enabled the company to not only close the gap but get ahead in many cases, AMD's credibility with customers has continued to climb,” the 5-star analyst explained. “This should enable AMD to gain a larger share of the wallet, especially on the faster growing cloud data center TAM.”
Another enticing aspect concerns AMD’s valuation. Like others, AMD shares have not been spared in 2022’s brutal market – down 46% year-to-date. But this now offers a “favorable valuation and an attractive reward/risk profile.”
As such, based on the above, Srivastava raises his rating from Market Perform (i.e., Neutral) to Outperform (i.e., Buy) while the price target is also increased – from $100 to $115. Should the figure be met, investors are looking at 12-month upside of 48%. (To watch Srivastava’s track record, click here)
Srivastava is hardly the only analyst to come out bullish for AMD; the stock has a 19 to 8 split in favor of Buys reviews over Holds, giving it a Moderate Buy consensus rating. The shares are priced at $78.88 and their $130.65 average target suggests room for ~66% appreciation next year. (See AMD stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
Advanced Micro Devices (NASDAQ: AMD) stock has dropped more than 50% from its 52-week high. Moreover, it has fallen by about 46% year-to-date. Despite the substantial decline in AMD stock and its strong financial outlook, multiple headwinds could stall the recovery in its price in 2022.
Factors that Could Limit Recovery in AMD StockAMD gained significantly from the work-from-home phenomenon that spiked end market demand. However, with easing restrictions, demand is moderating. Moreover, a weak macro environment could impact consumer spending and, in turn, AMD’s growth.
Furthermore, the rising GPU (graphics processing unit) inventories and the decline in retail pricing spell trouble for AMD and its peers. Also, AMD faces tough comparisons in the coming quarters, which could impact its growth.
Susquehanna analyst Christopher Rolland, who maintains a Buy recommendation on AMD stock, lowered his price target to $120 from $140.
Rolland stated, “We remain cautious on the PC market into 2H22, supported by disappointing ODM builds, soft channel checks, building PC inventories, and lowered pricing.” The analyst also lowered the price target for Nvidia (NASDAQ: NVDA) and Intel (NASDAQ: INTC).
Long-term Fundamentals Remain IntactWhile softening consumer GPU trends and moderation in demand pose near-term challenges, AMD’s long-term fundamentals remain intact.
AMD’s management is upbeat and expects its top line to increase at a CAGR of 20% in the next three to four years. New product launches, expansion of its addressable market, and benefits from the Xilinx acquisition will support its top-line growth.
Along with the ongoing momentum in its top line, AMD plans to expand its margins through a better product mix. It projects gross margins of more than 57% while operating margins are expected to be in the mid-30%.
Strong revenue and margin expansion will support its free cash flows. AMD expects its FCF (free cash flow) margin to surpass 25% in three to four years.
Bottom LineThough AMD’s long-term fundamentals remain solid, near-term challenges keep analysts cautiously optimistic. AMD stock has got 18 Buy and nine Hold recommendations for a Moderate Buy rating consensus. Further, the average AMD price target of $130 implies 67.7% upside potential.
It’s worth mentioning that hedge funds have been accumulating AMD stock. According to TipRanks’ Hedge Fund Trading Activity tool, hedge fund managers have bought 9.3 million AMD shares in the last three months.
Furthermore, per our data-driven stock score, AMD stock has an Outperform Smart Score of 9 out of 10.