By Wallace Witkowski
Wall Street analysts were in lockstep on Advanced Micro Devices Inc. Friday, agreeing that the chip maker’s forecast sales to PC customers were worse-than-expected, and that the bottom to 2022’s dismal chip market was still somewhere down there.
AMD shares /zigman2/quotes/208144392/composite AMD -2.67% dropped 13.9% Friday to close at $58.44, while the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.73% fell 2.8%, and the tech-heavy Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.70% dropped 3.8%. It was also the worst one-day percentage drop in AMD shares 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 reduce expectations now rather than Nov. 1, when the company is scheduled to report results.
In his note titled, “Let the ‘Buy the Confession’ Notes Begin.” Jefferies analyst Mark Lipacis, who has a buy rating and a $120 price target, called the general theme of Friday’s chip analyst notes: Worse-than-feared PC sales give analysts a better view of what is causing 2022’s chip glut and how it can clear, but not so good as to reliably pick a bottom, but AMD’s fundamentals are better than most either way.
Lipacis said now that AMD is on level with the rest of the industry on how bad PC sales have been, he advises that now is the time to buy AMD, noting that the chip maker’s “higher-than-expected inventory levels based on mismatched and partial manufacturing kits.”
Chip shares took an additional battering Friday as the U.S. Commerce Department imposed new restrictions on semiconductor technology sold to China , sending the PHLX Semiconductor Index /zigman2/quotes/210598361/realtime SOX -0.86% down 6.1% for their third one-day 6% drop of the year.
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 PC vendor sales to about $1 billion, compared with Wall Street’s consensus estimate of $2.04 billion, and that figure stood out for analysts.
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 more evident in August when AMD 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 the company stressed it was sticking to its full-year guidance of $26 billion to $26.6 billion.
Last week, memory-chip maker Micron Technology Inc. /zigman2/quotes/205710729/composite MU -0.60% said the “unprecedented” market downcycle wore a $1-billion-dollar-sized hole in their pocket for the current quarter, and in late August, Nvidia Corp. /zigman2/quotes/200467500/composite NVDA -0.98% cut $1 billion from its forecast.
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 evening, that had dropped to $6.1 billion and $25.04 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.
In “Substantial PC Reset but Not All the Decks are Clear Yet,” Barclays analyst Blayne Curtis said he expects the PC market dipping 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.
Curtis, however, said the warning “does appear to be a clear the decks event for AMD’s PC segment.” Those numbers make a tough comparison to 2021’s best-in-a-decade 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 Intel finally releasing more competitive parts,” he said.
“We fully acknowledge that Intel has not inspired any confidence in its roadmap, but we still don’t see AMD working with that on the horizon if estimates continue tocome down in 2023 as the rest of the business corrects,” Curtis said.