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The Ratings Game: AMD warning prompts analysts to revisit whether PC chip market has bottomed yet

Wall Street analysts were in lockstep on Advanced Micro Devices Inc. Friday, agreeing that the chip maker’s forecast sales to PC customers were worse-than-expected, and that the bottom to 2022’s dismal chip market was still somewhere down there.

AMD shares
AMD,
-13.87%

dropped 13.9% Friday to close at $58.44, while the S&P 500 index
SPX,
-2.80%

fell 2.8%, and the tech-heavy Nasdaq Composite Index
COMP,
-3.80%

dropped 3.8%. It was also the worst one-day percentage drop in AMD shares since March 12, 2020, the day after the World Health Organization declared COVID-19 a global pandemic, when shares closed down 14.6%. Late Thursday, AMD decided to reduce expectations now rather than Nov. 1, when the company is scheduled to report results.

In his note titled, “Let the ‘Buy the Confession’ Notes Begin.” Jefferies analyst Mark Lipacis, who has a buy rating and a $120 price target, called the general theme of Friday’s chip analyst notes: Worse-than-feared PC sales give analysts a better view of what is causing 2022’s chip glut and how it can clear, but not so good as to reliably pick a bottom, but AMD’s fundamentals are better than most either way.

Lipacis said now that AMD is on level with the rest of the industry on how bad PC sales have been, he advises that now is the time to buy AMD, noting that the chip maker’s “higher-than-expected inventory levels based on mismatched and partial manufacturing kits.”

Chip shares took an additional battering Friday as the U.S. Commerce Department imposed new restrictions on semiconductor technology sold to China, sending the PHLX Semiconductor Index
SOX,
-6.06%

down 6.1% for their third one-day 6% drop of the year.

AMD now expects third-quarter revenue of about $5.6 billion, down from its previous $6.5 billion-to-$6.9 billion forecast, as AMD expects a 40% drop in PC vendor sales to about $1 billion, compared with Wall Street’s consensus estimate of $2.04 billion, and that figure stood out for analysts.

The writing was on the wall in July when analysts were forecasting the worst drop in PC sales in more than a decade, following the largest number of shipments in a decade in 2021, driven by pandemic sales.

PC weakness was more evident in August when AMD issued a forecast that was uncharacteristically below the Wall Street consensus at the time, but still one of the most optimistic of the bunch, as the company stressed it was sticking to its full-year guidance of $26 billion to $26.6 billion.

Last week, memory-chip maker Micron Technology Inc.
MU,
-2.93%

said the “unprecedented” market downcycle wore a $1-billion-dollar-sized hole in their pocket for the current quarter, and in late August, Nvidia Corp.
NVDA,
-8.03%

cut $1 billion from its forecast.

Prior to AMD’s warning, analysts polled by FactSet had forecast third-quarter revenue of $6.71 billion, and annual sales of $26.13 billion. By Friday evening, that had dropped to $6.1 billion and $25.04 billion, respectively.

In a note titled, “We Knew It Was Going to Be Bad… Now When Does It Bottom?” Susquehanna Financial analyst Christopher Rolland said “this preannouncement may imply something a bit worse.”

“Overall, while we wait for a bottom in the PC industry, we believe AMD will continue to take share from Intel (albeit more slowly than the last few years),” said Rolland, who has a positive rating on the stock, lowered his price target to $85 from $95.

Read: AMD shows the end of the PC boom may be hurting chip makers more than expected

In “Substantial PC Reset but Not All the Decks are Clear Yet,” Barclays analyst Blayne Curtis said he expects the PC market dipping below pre-pandemic levels of 265 million to 275 million units next year. Curtis has a neutral rating and lowered his price target to $68 from $85.

Curtis, however, said the warning “does appear to be a clear the decks event for AMD’s PC segment.” Those numbers make a tough comparison to 2021’s best-in-a-decade 349 million shipped units.

“When we downgraded AMD back in March, a material PC correction was the biggest part of our thesis but we also felt that the name wouldn’t be able to retain a growth multiple until the 2024+ story is better understood with Intel finally releasing more competitive parts,” he said.

“We fully acknowledge that Intel has not inspired any confidence in its roadmap, but we still don’t see AMD working with that on the horizon if estimates continue tocome down in 2023 as the rest of the business corrects,” Curtis said.

In late June, Intel Corp.
INTC,
-5.37%

dropped its over-optimistic forecast when it reported dismal results and cut its outlook for the year.

In “Joining the club…,” Bernstein analyst Stacy Rasgon said weak PC sales were expected, but admitted “we suspect the magnitude was quite a bit larger than anticipated.” Rasgon has an outperform rating and a $135 price target on AMD.

Even though AMD has “recently been talking the space down,” Rasgon said, “the miss was BIG.”

Before the warning: If AMD earnings were a snack: ‘A little crunchy on the outside, but the creamy center still tastes good’

“So now what?” Rasgon said. Now that AMD “has now joined the club” of other chip makers confessing that sales to PC vendors have been worse than feared, the lack of any reference to the fourth quarter was well noted.

“But while we admit this cut is disappointing and bigger than we would have anticipated it may represent a clearing event at least for PCs (datacenter may remain the sticky point; it looks fine in Q3 but we suspect investors are going to be a bit nervous still until we get more clarity on Q4,” Rasgon said.

Cowen analyst Matthew Ramsay, who has an outperform rating and a $120 price target, said that the pre-announcement, while rough, did not change his thesis.

“Whether this negative pre-announcement is truly a ‘ripping off of the band-aid’ moment or not with respect to Street estimates, we have high conviction in the company’s fundamental share gain story (within an admittedly weaker PC market but still resilient datacenter environment) and continue to view AMD as one of the most attractive growth names in semis,” Ramsay said.

Mizuho analyst Vijay Rakesh, who has a buy rating and lowered his price target to $102 from $125, also brought of the lack of any word on the fourth quarter.

“While AMD did not give DecQ guidance, we believe we could see potential weakness in server/data center (Link) with US hyperscalers pushing out orders into 2023, and softening Europe/China,” Rakesh said.

Of 41 analysts surveyed by FactSet, 29 have buy-grade ratings, 11 have hold ratings, and one has a sell rating. With more than 10 analysts lowering their price targets, the average price target on the stock has fallen to $110.94, down from $123.34, according to FactSet data.

Over the year, AMD stock has dropped 59% as of Friday’s close, while the SOX index has fallen 40%, the S&P 500 is off 24% and the Nasdaq is down 32%.

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