This chipmaker remains among Wall Street’s favorite stocks

  • AMD and other chipmakers face the possibility of demand destruction if the economy enters a recession
  • Shares have lost about a third of their value this year

  • CEO Lisa Su has laid out a pretty strong growth scenario during the company’s Investor Day last week.

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Investors are rapidly rebalancing their portfolios as the risk of the US economy slipping into recession increases. In general, they are moving away from high-growth stocks and buying value stocks that are more likely to withstand a prolonged downturn.

One of these victims is the semiconductor manufacturer Advanced Micro Devices (NASDAQ:).

During the pandemic boom of tech stocks, AMD was one of the most beloved chip stocks. But in 2022, the stock has lost more than a third of its value after rising 50% in 2021. The stock closed Friday at $94.82.

However, the sharp drop is leaving investors and analysts alike wondering: has this pullback gone too far?

Given the current uncertain macro environment, it is difficult to predict where AMD shares will trade in the short term. Overall, the biggest threat to chipmakers comes from the growing possibility of demand destruction if the economy slips into recession later this year.

The chances of this happening increased last week after the latest US inflation reading showed that price pressures are now well entrenched in the economy. Chipmaker shares have been hit this year by rising interest rates and concerns about slowing economic growth, which could leave semiconductor companies with excess inventories.

The is down 28% this year, compared to the 18% drop in the .

Strong sales forecast

At the moment, AMD managers do not see that this adverse macro environment will slow down the demand for their chips. The company earlier last month gave one for the current quarter, signaling that the chipmaker is continuing to make inroads into its most lucrative market: data center processors.

AMD predicted second-quarter sales of about $6.5 billion, versus a median analyst estimate of $6.03 billion. But in the semiconductor industry, it doesn’t take much to reverse the cycle.

Its competitor NVIDIA (NASDAQ:), which published its three weeks later than AMD, gave a disappointing quarterly earnings forecast, blaming Chinese supply chain problems and the war in Ukraine. NVIDIA, the largest US chipmaker by market capitalization and a leading supplier of semiconductors used in data centers, sees itself as a benchmark for the industry.

Despite concerns about demand – which could slow dramatically in the event of a recession – many analysts remain bullish on AMD’s stock given its long-term outlook. During the company’s Investor Day last week, AMD CEO Lisa Su laid out a strong growth scenario in which she expects a 20% CAGR for the company, helped by the company’s latest deal. AMD merger with the semiconductor company Xilinx.

Analysts remain bullish

AMD expects a gross margin of over 57%, driven by a mix of new offerings. At the same time, operating expenses are expected to be around 23-24%. The chipmaker expects its operating margin to hover around 30% as the tech giant improves its margins and profitability.

Following the company’s Investor Day last week, Goldman Sachs (NYSE:) analyst Toshiya Hari reiterated her buy target of $133 per share, implying 35% upside potential. Her note said:

“We left the event with increased conviction in AMD’s market share prospects, as well as its ability to drive revenue synergies associated with the Xilinx and Pensando acquisitions.”

“AMD is not immune to macro volatility; however, we believe there are enough positive offsets for the company to maintain its fundamental outperformance.”

Raymond James analyst Chris Caso, in his note, said that AMD is in a strong position to wrest more market share from Intel (NASDAQ:) in the coming days.

“However, our main thesis on AMD is that INTC’s 80+% market share is simply unsustainable, even if INTC manages to catch up, as we don’t see any possible scenario where INTC has a significant performance advantage until now. the year 2025, and it is very possible that INTC fails to comply with its aggressive roadmap”. With AMD stock now trading at ~16x that $6 earnings power in 2024, we think that’s a very attractive multiple for a company with top 20% growth prospects.”

Piper Sandler raised AMD’s rating to overweight in a recent note, while raising her price target to $140 from $98. Her note read:

“There are two old sayings in the investment world: 1) ‘You can’t time the market, so don’t try’ and 2) ‘Buy good companies when they are down.’

conclusion

Except for macro risks, everything else seems to be going well for AMD. In our opinion, its current weakness opens a door for long-term investors to build their positions.

That said, the stock is unlikely to deliver the kind of sizeable returns that investors saw last year, when the global economy was on a different trajectory.

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