AMD warning prompts analysts to revisit whether PC chip market has bottomed yet

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

AMD shares AMD,
fell 13.9% on Friday to close at $58.44, while the S&P 500 Index SPX,
fell 2.8% and the tech-heavy Nasdaq Composite Index COMP,
fell by 3.8%. It was also AMD’s worst single-day percentage drop 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 lower expectations now rather than on November 1 when the company is scheduled to report earnings.

In his note titled “Let the ‘buy the confession’ notes begin.” Jefferies analyst Mark Lipacis, who has a buy rating and a price target of $120, outlined the general theme of Friday’s chip analyst notes: Worse than feared PC sales, analysts are giving a better picture of what’s causing the 2022 chip glut and how to fix it, but not good enough to reliably find a bottom, but AMD’s fundamentals are better either way than most others.

Lipacis now said that AMD is on par with the rest of the industry in terms of poor PC sales. He advises that now is the time to buy AMD, noting that the chipmaker’s “higher than expected inventory levels on mismatched and partial fab kits.”

Chip stocks took an additional hit on Friday when the US Commerce Department imposed new restrictions on the sale of semiconductor technology to China and sent the PHLX Semiconductor Index SOX.
6.1% down for its third one-day 6% drop of the year.

AMD now expects third-quarter revenue of about $5.6 billion to $6.9 billion, down from its previous guidance of $6.5 billion, as AMD anticipates a decline in sales from PC vendors 40% expected to hit about $1 billion, compared to Wall Street’s consensus estimate of $2.04 billion, and that number stood out for analysts.

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The writing was on the wall in July as analysts forecast the worst drop in PC sales in more than a decade after 2021 saw the largest number of shipments in a decade due to pandemic sales.

PC weakness became more apparent in August, when AMD issued a forecast that was uncharacteristically below the Wall Street consensus at the time, but was still one of the group’s most optimistic, as the company emphasized that it was meeting its full-year guidance of $26 -dollars hold billions at $26.6 billion.

Last week, memory chip maker Micron Technology Inc. MU,
said the “unprecedented” market downturn left a $1 billion hole in its pocket for the current quarter, and in late August Nvidia Corp. NVDA,
Forecast cut by $1 billion.

Prior to AMD’s warning, analysts polled by FactSet had forecast third-quarter revenue of $6.71 billion and full-year revenue of $26.13 billion. By Friday night, that had fallen to $6.1 billion and $25.04 billion, respectively.

In a note titled, “We knew it was going to be bad … now when is it going to end?” Susquehanna financial analyst Christopher Rolland said, “This advance notice could portend something worse.”

“Overall, while we wait for a bottom in the PC industry, we believe AMD will continue to acquire shares from Intel (albeit at a slower rate than in recent years),” said Rolland, who has a positive rating on the stock his price target from $95 to $85.

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Read: AMD shows that the end of the PC boom could hurt chipmakers 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 to slip 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.

However, Curtis said the alert “seems to be a clear event for AMD’s PC segment.” Those numbers are a tough comparison to the top 349 million units shipped in 2021.

“When we downgraded AMD in March, a major PC fix was most of our thesis, but we also felt the name wouldn’t be able to hold a growth multiple until the story of 2024+ gets better.” understood and Intel is finally releasing more competitive parts,” he said.

“We fully acknowledge that Intel hasn’t inspired confidence in its roadmap, but we still don’t see AMD working with that on the horizon if estimates continue like this
Coming down in 2023 when the rest of the business corrects,” Curtis said.

At the end of June, Intel Corp. INTC,
Reporting dismal results, it dropped its overly optimistic forecast and lowered its outlook for the year.

In “Joining the club…” Bernstein analyst Stacy Rasgon said weak PC sales were expected, but acknowledged “we suspect the magnitude was a lot bigger than expected.” Rasgon has an outperform rating and a price target from $135 for AMD.

Although AMD “recently talked the place down,” Rasgon said, “the failure was HUGE.”

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

“So what now?” said Rasgon. With AMD “now joining the club” with other chipmakers admitting sales to PC vendors were worse than feared, the lack of any reference to the fourth quarter was well noted.

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“But while we admit this cut is disappointing and larger than we expected, it could represent a clearing event, at least for PCs (the data center may remain the sticking point; Q3 is looking good, but we suspect that investors will be a bit nervous until we have more clarity on Q4,” said Rasgon.

Cowen analyst Matthew Ramsay, who has an outperform rating and a price target of $120, said that while the advance notice was rough, it didn’t change his thesis.

“Whether or not this negative announcement regarding Street’s estimates is truly a ‘tearing off the pavement’ moment, we are confident in the company’s fundamental stock earnings history (in an admittedly weaker PC market, but still a resilient data center). environment) and continue to view AMD as one of the most attractive growth names in the semifinals,” Ramsay said.

Mizuho analyst Vijay Rakesh, who has a buy rating and lowered his price target to $102 from $125, also expressed no words on the fourth quarter.

“While AMD DecQ hasn’t provided guidance, we believe we could see potential server/data center (link) weakness as US hyperscalers delay orders into 2023 and Europe/China soften,” Rakesh said.

Of 41 analysts polled by FactSet, 29 have a buy rating, 11 have a hold rating, and one has a sell rating. As more than 10 analysts lowered their price targets, the stock’s average price target has fallen from $123.34 to $110.94, according to FactSet data.

For the year, AMD stock is down 59% at Friday’s close, while the SOX index is down 40%, the S&P 500 is down 24% and the Nasdaq is down 32%.

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