Wall Street appeared fairly in unison on Advanced Micro Devices Inc. Friday, agreeing the firm’s forecast sales to PC customers were worse-than-expected, prompting the question of whether the chip market has reached the bottom yet.
AMD shares
AMD,
fell more than 10%, touching an intraday low of $60.44, and were last down at $60.62, while the broader market was down more than 2%. Chip shares took an additional battering Friday as the U.S. Commerce Department imposed new restrictions on semiconductor technology sold to China, driving the PHLX Semiconductor Index
SOX,
down more than 5%.
AMD shares were also on track for their worst one-day percentage drop since March 16, 2020, a few days after the global COVID-19 pandemic became official, when they closed down 11.8%.
Late Thursday, the chip maker decided to reduce expectations now rather than Nov. 1, when the company is scheduled to report results.
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 pretty evident in August when AMD reported earnings and 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 it stressed it was sticking to its full-year guidance of $26 billion to $26.6 billion.
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 client sales to about $1 billion, compared with Wall Street’s consensus estimate of $2.04 billion, and that figure stood out for analysts. Last week, memory-chip maker Micron Technology Inc.
MU,
said the “unprecedented” market downcycle wore a $1-billion-dollar-sized hole in their pocket for the current quarter.
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 morning that had dropped to $6.24 billion and $25.29 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
Barclays analyst Blayne Curtis, who has a neutral rating and a $68 price target down from $85, said he expects the PC market dipping below pre-pandemic levels of 265 million to 275 million units next year, and said the warning “does appear to be a clear the decks event for AMD’s PC segment.” That’s compared with 2021’s 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 INTC finally releasing more competitive parts,” he said.
“We fully acknowledge that INTC has not inspired any confidence in its roadmap, but we still don’t see AMD working with that on the horizon if estimates continue to
come down in 2023 as the rest of the business corrects,” Curtis said.
In late June, Intel Corp.
INTC,
dropped its over-optimistic forecast when it reported dismal results and cut its outlook for the year.
Weak PC sales were expected, said Bernstein analyst Stacy Rasgon, who has an outperform rating and a $135 price target, but admitted “we suspect the magnitude was quite a bit larger than anticipated.”
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.
Jefferies analyst Mark Lipacis, who has a buy rating and a $120 price target, called it in his note titled, “Let the ‘Buy the Confession’ Notes Begin.”
Now that AMD is on level with the rest of the industry on how bad PC sales have been, Lipacis advises that now is the time to buy AMD, noting that the chip maker had “higher-than-expected inventory levels based on mismatched and partial manufacturing kits.”
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 53% as of Thursday’s close, while the SOX index has declined 36%, the S&P 500 index
SPX,
has fallen 21%, and the tech-heavy Nasdaq Composite Index
COMP,
has shed 29%.
