AMD’s rally is cooling amid a potential “fatigue” in the PC market, an analyst suggests in downgrading
Piper Sandler analyst worries about the possibility of a slowdown in the computer market for consumers this year and is worried about the imminent deal with Xilinx.
After a massive rally over the last few years, Advanced Micro Devices Inc. shares could be in for a more challenging ride due to the signs of fundamental “fatigue.”
Piper Sandler analyst Harsh Kumar reduced AMD’s stock AMD -2.53% to neutral overweight on Thursday, stating that a slowdown in AMD’s PC market could affect growth in the coming year. Shares of AMD are off 0.9% Thursday.
While Kumar isn’t expecting “a breakdown in fundamentals in the near-term” or earnings losses in the coming couple of quarters, the analyst predicts that specific industry dynamics may change and become less favorable.
Researcher Gartner reported an increase of 5% in global PC sales in the fourth quarter of 2018. Even though 2021 was an impressive year for the industry, Kumar thinks growth will fall in 2022 because the PC market for consumers might be showing “signs of fatigue.”
“[U]ltimately we do see a combination of growth and a slowing PC environment burdening the stock,” the analyst wrote in his letter to customers. “In our eyes, this represents a high-multiple setup coupled with a slowdown in growth.”
AMD’s stock has dropped around 12 percent this year, after having soared by 57% during 2021 before climbing to 100 percent in 2020. AMD’s stock has grown 13 times in the past four years.
Kumar is also concerned about what AMD’s planned deal with Xilinx Inc. XLNX, +1.17%, could be a negative for the company’s financials and its perception. The analyst believes that AMD will grow its organic revenue to around 24% by 2022, following 65% in 2021. But considering the slower growth estimates analysts are putting forth regarding Xilinx, Kumar forecasts a year-over-year increase for AMD and Xilinx that ranges from 21%-22 to 22 percent.
Kumar believes there are some positive financial aspects to the deal, such as the possibility of boosting AMD’s operating margins overall. But he is also of the opinion that the merger may “only be a few cents accretive in the first full year, which is below initial expectations at the time of the deal announcement.”
The merger, therefore, is likely to “lead to more fatigue in the near term than benefit given the lower growth profile and limited initial cost cuts,” the author wrote.
AMD was expecting it to close the Xilinx deal to be completed in 2021. However, it has not yet received all the required regulatory approvals and currently anticipates that the agreement will be completed in the first quarter of 2022.
Kumar has also lowered his rating for shares at NXP Semiconductors NXPI +0.17 percent VNX -2.51 percent in the direction of neutral, from overweight on Thursday because of his concerns regarding the automotive industry.
“We believe the pace of orders and strong pricing may come into question as supply normalizes in the second half of calendar 2022,” he wrote.
The analyst said around half of the company’s revenue is derived from the auto industry, which makes NXP the company “most at risk” from this pattern among the stocks he monitors.
The shares of NXP are down 0.5 percent in trading on Thursday. They’ve gained about 6.3 percent over the last three months, and AMD shares have increased by 9.4 percent, while they have risen 9.4%, while the S&P 500 SPX -1.89% has grown by 1.3 percent…
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