Advanced Micro Devices (AMD) is a success story that shows no signs of souring. Its business has been perfectly suited to deal with the global pandemic, as it caters to the full spectrum of shelter in place trends. These include gaming (using AMD GPUs), cloud-based services, (reliant on AMD server chips) and personal computers (using AMD CPUs). Over the last few years, it has taken market share from both of its traditionally bigger rivals, Nvidia and Intel, and has managed to capitalize on Intel’s recent travails.
But Deutsche Bank analyst Ross Seymore has some reservations. Even though Seymore applauds the chipmaker’s progress, the analyst has an issue with AMD’s lofty valuation, and said, “AMD’s market share gain story is becoming much cleaner in light of INTC’s 7nm missteps, which creates a bull case narrative for higher market share in the next 3-5 years. However, with the stock trading at ~50x our CY22 estimate (and ~35x the company’s own implied 2023 target of ~$2.50), we feel that the bull case is appropriately priced in.”
Seymore has another issue. The 5-star analyst recently made some adjustments to his AMD models, and expects overall 2020 revenue to be up by 33% year-over-year, which comes in slightly above AMD’s guidance for a 32% revenue increase. So, all fine there.
However, Seymore says AMD’s estimated gross margins appear confusing. The company expects GMs to stay at 44% in both Q2 (the June quarter) and Q3. Given that in Q3 the company expects an uptick from the “margin dilutive” SemiCustom segment with no boost to the other 75% of revenue makes Seymore wonder how AMD will pull this feat off.
And even though Seymore expects Semi-Custom GMs from 2Q to 3Q to improve from 10% to – give or take – 22%, this improvement alone is “insufficient to achieve the company’s guidance and therefore would still require meaningful q/q GM% expansion in the remaining ~75% of revenues.”
That said, if prior performance is anything to go by, AMD has proved capable of outperforming expectations time and again.
Which Seymore recognizes when he sums up, “Overall, AMD’s track record of consistently achieving its GM guidance over the last two years has been very impressive, but the credit the company receives should rise even further if this streak continues in 2H20.”
In conclusion, Seymore reiterated a Hold on AMD shares and kept his price target at $75. Therefore, the 5-star analyst expects shares to drop by 8% over the coming months. (To watch Seymore’s track record, click here)
Out on the Street, AMD is receiving mixed signals. Based on 14 Buys, 11 Holds and 1 Sell, the chipmaker has a Moderate Buy consensus rating. However, the analysts project shares to decline by 2% over the coming months as implied by the $80.09 average price target. (See AMD stock analysis 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.
