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AMD A Chip Stock To Buy In This Down Cycle

By Haris Anwar/Investing.comStock MarketsOct 07, 2022 01:12PM ET
www.investing.com/analysis/amd-a-chip-stock-to-buy-in-this-down-cycle-200630812
AMD A Chip Stock To Buy In This Down Cycle
By Haris Anwar/Investing.com   |  Oct 07, 2022 01:12PM ET
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  • AMD’s latest sales numbers show the slump in demand is much deeper than expected
  • AMD stock has lost about 60% of its value this year amid fears of a recession
  • AMD has been an analysts’ favorite in both up and down cycles due to the company’s success in grabbing market share

The latest earnings update from the semiconductor manufacturer Advanced Micro Devices (NASDAQ:AMD) shows that the slump in demand is much deeper than it had expected, dashing hopes of a quick recovery in its beaten-down share price.

The California-based AMD late yesterday gave its preliminary sales numbers for the third quarter that missed projections by more than $1 billion. Revenue in the period, which ended on Sept. 30, was about $5.6 billion, lower than the average analyst estimate and the company’s own forecast, which was for $6.7 billion.

The steep decline in sales from one of the most-loved chip-makers shows that the worsening macroeconomic conditions are destroying demand quickly and forcing companies to hold back on their spending. The worst-hit area, according to AMD, is the PC market, where weakening demand and a build-up of inventory are causing chip buyers to move on the sidelines.

AMD Projections
AMD Projections

Source: InvestingPro

Recession fears are forcing tech companies to cancel or postpone orders, a sharp reversal from the post-pandemic spending binge, when businesses were building inventories in anticipation of soaring demand.

AMD shares were trading about 8% lower at the time of writing, extending their year-to-date losses to about 56%. These losses are worse than the Philadelphia Semiconductor Index, which is down 39% this year.

After considerable weakness in the PC segment, investors are closely watching demand signals from cloud-computing, automotive and factory automation to gauge whether the current slowdown is broad-based and could hit areas that have remained solid so far.

These uncertainties are making it hard to call a bottom in the chip sector, which is known for its boom-and-bust cycles and whose fate is so closely tied with the economy.

Still, many analysts believe the current market conditions are well-reflected in the share price of AMD, which trades at 13 times its forward earnings. Bank of America reiterated AMD as a buy after its disappointing sales outlook yesterday.

In an Investing.com poll of 45 analysts, more than 60% still rate AMD as a buy with their 12-month price target, implying a 77% upside potential.

Consensus Estimates For AMD Stock
Consensus Estimates For AMD Stock

Stifel, in a recent note to clients, said AMD will continue to expand profitability and market share even in the weakening demand environment when compared with its competitors.

The note says:

“Despite near-term demand volatility, we expect share gains to drive growth well above market, and we expect gross and operating margin expansion to continue, which ultimately, should drive multiple expansion, in our view.”

AMD has been an analysts’ favorite in both up and down cycles due to the company’s success in grabbing market share from the industry titan Intel Corp (NASDAQ:INTC). Though AMD is not immune to macro headwinds, there are enough reasons to believe that it will be able to sustain its fundamental outperformance.

In a recent note to clients, BMO Capital Markets made similar arguments as the investment bank remains bullish on AMD’s long-term prospects.

According to its note:

“Our view is that we see a path to sustained share gains against Intel...and we do not need Intel to mis-execute for the thesis to work. Our sense is that with the several key architectural innovations the company has made, along with rolling out a lineup of products that has enabled the company to not only close the gap but get ahead in many cases, AMD’s credibility with customers has continued to climb.”

Bottom Line

It’s quite hard to remain bullish on the chip sector in the current environment when demand is shrinking and stock prices are collapsing. But this is the time for long-term investors to go and pick stocks that have the power to get back on a growth trajectory quickly. AMD is one such stock, in my view.

Disclaimer: At the time of writing, the author doesn’t own AMD shares. The views expressed in this article are solely the opinion of the author and should not be taken as investment advice.
AMD A Chip Stock To Buy In This Down Cycle
 

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AMD A Chip Stock To Buy In This Down Cycle

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Comments (7)
Gershom Zvi
Gershom Zvi Oct 09, 2022 2:38AM ET
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Might be green Only for short period rebound 1-2 days with package of Soxl
Mr Doodl
Mr Doodl Oct 08, 2022 4:19PM ET
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very goof article
Mr Doodl
Mr Doodl Oct 08, 2022 4:19PM ET
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good
Kris Jay
Kris Jay Oct 08, 2022 12:55PM ET
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it hasnt lost 60% of its value, it lost 60% of the stock price which was 80-100% more than the value. i.e. you are measuring from a lofty level which was not prudent and not the actual value.   Need something which is 12-16x as a P/E once we understand what the forward E is.  (a lot lower than it was).
Mohammad Abdullah
Mohammad Abdullah Oct 07, 2022 4:22PM ET
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Buy under 40. After earning go down 10% more
Steven Collar
Steven Collar Oct 07, 2022 1:58PM ET
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Keep watching. When market turns, buy.
Peter ONeill
Peter ONeill Oct 07, 2022 1:58PM ET
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Problem is - no one will ever time the market 100% right (the whole reason you have FOMO rallys). But I think it will continue to fall for the next few months and bottom next summer. Will stay around here for a while but it will be 2024 before the markets start to rebound (so say we are in for a 15-18 month bear market). Personally, I wont start buying shares apart from my monthly pension (due to taxes etc) until markets are below pre covid levels - so S&P around 3k Nasdaq around 8k and Dow around 25k...personally think could get there next summer if not sooner.
Peter ONeill
Peter ONeill Oct 07, 2022 1:44PM ET
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Wouldnt go near AMD at these prices even though already down 60% YTD. Large oversupply of chips and chip capacity on the market, going into a recession, interest rate rising and chip stocks always hit the hardest in times like now. Its not wildly overvalued, but I still would expect it to fall back to March 2020 Covid support levels within the next 12-18 months - which would be around $40
Luis Huasasquiche
BravoTrader Oct 07, 2022 1:44PM ET
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Agree
Steven Collar
Steven Collar Oct 07, 2022 1:44PM ET
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Agree
Ma Lu
Ma Lu Oct 07, 2022 1:44PM ET
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That would be a disaster
David Beckham
David Beckham Oct 07, 2022 1:19PM ET
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Ok short now since no one buy pc anymore
Tedy Tadi
Tedy Tadi Oct 07, 2022 1:19PM ET
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Good one …
Jan Jensen
MadeForStreets Oct 07, 2022 1:19PM ET
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Yeah all these young people needs, is just a phone, the generation of, i don't care, yeahhh world, when they take over, Jesus...
aux fipe
aux fipe Oct 07, 2022 1:19PM ET
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Jan Jensen your parents said the same thing about you.
Jim Horn
Jim Horn Oct 07, 2022 1:19PM ET
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Jan Jensen you know you are getting old when you say that..even though I agree in full
 
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