Advanced Micro Devices Stock Sinks as PC Chip Sales Slump

Advanced Micro Devices (AMD, $82.43) stock sold off sharply Wednesday in response to the chipmaker's first-quarter earnings report, which it disclosed after the previous session's closing bell. AMD said adjusted Q1 earnings were down 47% year-over-year to 60 cents per share, while revenue declined 9% to $5.35 billion. Gross margin declined 3 percentage points over the three-month period to 50%, and operating expenses climbed 18%. 

AMD's gaming division (32.8%) was the largest contributor to first-quarter revenue, followed by its data center segment (24.2%). The largest year-over-year increase in revenue came from the company's embedded section (+163%), which makes central processing units (CPUs) for high-performance computing systems, automakers and cloud services companies. Meanwhile, its client division, which makes processing units for desktop and notebook personal computers, suffered the biggest year-over-year decline in revenue, down 65.2% over Q1 2022.

"We executed very well in the first quarter as we delivered better than expected revenue and earnings in a mixed demand environment," said Dr. Lisa Su, chair and CEO of Advanced Micro Devices, in the company's Q1 press release. 

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Looking ahead, though, Su expects uncertainty in the macro environment to continue to cloud the near term outlook. "Based on customer demand signals, we expect second-quarter revenue will be flattish sequentially with growth in our client and data center segments, offset by modest declines in our Gaming and Embedded segments," Su said in AMD's earnings call. On a year-over-year basis, Advanced Micro Devices is guiding to a 19% drop in Q2 revenue to $5.3 billion.

Is AMD a buy, sell or hold?

Analysts were quick to weigh in on AMD stock after the company's earnings report. 

"We're not surprised to see shares come under pressure as investors question/focus on AMD's expectation of double-digit data center growth in 2023 (or implying >50% uptick in the second half vs the first half)," says Wells Fargo analyst Aaron Rakers (Overweight, or the equivalent of Buy). The analyst expects the stock to pull back to around the $80 per-share mark, but says this is "an attractive entry point for long-term investors" in growth stocks. 

Elsewhere, BofA Securities analyst Vivek Arya cut his recommendation on Advanced Micro Devices stock. "We downgrade AMD to Neutral from Buy, following an inline Q1 but weak Q2 outlook on sluggish market recovery," Arya wrote in a note to clients. "We continue to like AMD's consistent execution and its breadth of product cycles in attractive compute/AI markets. However, in the near/medium-term, we see a range of headwinds."

Such headwinds include an aggressive pricing and promotion campaign from rival chipmaker Intel (INTC), a risky data center growth outlook and a "restrained" cloud spending environment, the analyst says.

Arya does, however, expect "some recovery" as AMD "outlines its AI vision and potential for growth in its unique converged AI (MI300) product." 

Arya's downgrade notwithstanding, Wall Street continues to view Advanced Micro Devices as one of the best semiconductor stocks. Of the 42 following analysts issuing recommendations on AMD tracked by S&P Global Market Intelligence, 22 call it a Strong Buy, seven say Buy and 13 have it at Hold. That works out to a consensus recommendation of Buy, with high conviction.

What is the target price for AMD?

The Street also has high expectations for AMD's share price. Analysts' price targets for the chip stock range from a high of $200 to a low of $76. That works out to an average target price of $100.75, which gives shares implied upside of roughly 22% over the next 12 months or so.

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