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.
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Factors that Could Limit Recovery in AMD Stock
AMD 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 Intact
While 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 Line
Though 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.
