Shares of Advanced Micro Devices (NASDAQ: AMD) slumped on Friday, ending the day 11.1% below Thursday's closing prices. The chip-designer's plunge resulted from an analyst firm starting coverage on the stock with a sell rating and a price target 33% below last night's trading prices.
Analyst Pierre Ferragu from financial firm New Street Research set his price target for AMD at $18 per share, arguing that the stock has been priced for a level of success that simply isn't realistic.
"AMD's stock price reflects a scenario we don't believe possible," Ferragu wrote. The company has scored some great wins in recent years but it "cannot win sustainably and beyond a niche positioning."
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In particular, Ferragu sees larger rival Intel (NASDAQ: INTC) getting its manufacturing act together as we speak. AMD's opportunity to exploit Intel's next-generation technology issues looks short-lived and overstated.
"Intel can easily bring to market an architecture similar to AMD's, with better performance," the analyst continued.
A similar manufacturing imbalance favored AMD in 2014, as well, Ferragu explained, but Intel came back swinging from that event. Overall, Ferragu sees no reason to treat AMD like an equal to Intel's massive economies of scale.
The analyst isn't wrong here, and AMD's stock has been trading at speculative levels for quite some time. Even after Friday's drop, these shares have gained 166% over the last six months and can be bought for the not-so-low price of 40 times forward earnings, or 139 times trailing free cash flows.
I might not be quite as skeptical of AMD's current valuation as the New Street Research analyst is, but I'm certainly not a buyer of AMD, either. I don't see much upside to owning this stock today, but lots and lots of potential downside.
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