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Too Far, Too Fast: Top Analyst Downgrades AMD To Hold

Advanced Micro Devices (AMD) investors have enjoyed stellar returns so far in 2019. Year-to-date the stock has exploded by 82%. But now is the time for caution, advises five-star Mizuho Securities analyst Vijay Rakesh.

This top-performing analyst has been a long-time AMD bull- upgrading the chip stock from Hold to Buy back in December 2016. However, Rakesh is now moving to the sidelines due to the stock’s increasingly pricey valuation. That’s despite a price target boost from $33 to $37, which from current levels indicates upside potential of just over 10%.

In a July 18 report, the analyst tells investors “While we continue to like AMD with a solid Ryzen/Rome portfolio and new product ramps, we are downgrading to Neutral after a stellar 80%+ run-up YTD.” In comparison, the semiconductor tracking index SOX is up just 30%. Indeed, the last time AMD was at these levels was in January 2006 with the Opteron cycle, and before that, back in 2000.

As a result, the analyst sees limited near-term upside potential for AMD. Rakesh explains: “With the stock past our PT and at 10-yr high, we see 2H upside more limited with 1) 1H19 PC pull-in, 2) slower 2H Rome ramps, and 3) overall 2H server/spending inline combined with INTC pricing pressure.”

Most notably, AMD’s larger rival Intel (INTC) is getting more aggressive with DC/Server pricing with discounts and upgrades to 4S servers. According to Rakesh, INTC could be approving higher 15%+ "meetcomp discounts" as it competes with AMD versus historical ~5% discounts. Plus it is also shifting to 4S/8S socket servers as AMD does not have a 4S server offering.

“We also believe [Intel’s] 8GPU servers are up 15-20% with increasing demand and 16GPU servers ramping into mass production at a higher price point” adds the analyst. And even though AMD started 7nm production Rome shipments in 2Q/June, the analyst expects product volume ramps only later in 4Q19/1Q20.

With this in mind, Rakesh concludes “We are moving to the sideline near-term, lowering our 2H estimates, and adjusting PT to $37 (prior $33) given good execution and improving SOX multiples.”

However, AMD supporters can take heart from the fact that the bull thesis remains intact. Indeed, Rakesh is clear that he would re-examine his current call should prices pullback: “We would revisit at a more attractive entry point as the we believe long-term 7nm Server/DT roadmap still intact” he says. So watch this space.

Word on the Street

Overall we can see that the Street has a relatively optimistic Moderate Buy analyst consensus on AMD. In the last three months, 13 analysts have published buy ratings on the stock vs 8 hold ratings. However the average analyst price target of $33.53 paints a more troubling picture, suggesting 0.2% downside potential for the stock from current levels.  

The stock’s biggest bull right now is Rosenblatt’s Hans Mosesmann with a $42 price target (25% upside potential). The analyst writes: “We expect AMD’s roadmap to continue to improve in the coming years while Intel’s desktop CPUs likely stagnate at 14nm++ until 7nm is available in 2022.”