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The Ratings Game: AMD stock now at a ‘reasonable valuation’ after near-50% pullback, Morgan Stanley says

If the semiconductor surge comes to an end, Advanced Micro Devices Inc. could be best positioned to sustain the pullback, Morgan Stanley analysts wrote Wednesday.

AMD
AMD,
+1.52%

shares traded slightly higher Wednesday while other chip makers declined overall, after Morgan Stanley resumed coverage of the stock. Analyst Joseph Moore established an overweight rating and $103 price target, writing that the company “offers potential for solid numbers at a reasonable valuation,” given its near-50% selloff from late-November highs.

“Overall, we are optimistic that the company’s prospects in data center (CPU, GPU, and FPGA) will provide enough growth to drive further positive estimate revisions over the next several quarters,” Moore said in a note.

AMD shored up its data-center offerings when it closed its purchase of Xilinx in February. Xilinx specializes in field-programmable gate array, or FPGA, chips that can be configured by a customer or a designer after they are made. Those chips, in turn, are used as accelerators in data centers to boost computing power and improve power efficiency in existing physical spaces. 

“Apprehensions we see in the consumer linked end-markets should leave AMD less exposed comparatively than key competitors, allowing us to underwrite conservative numbers that shouldn’t surprise much to the downside,” Moore said.

Analysts are concerned that the explosion in semiconductor sales amid a pandemic-influenced supply crunch could lead to a severe downturn in the months ahead, as inventories build and customers halt purchases. That has been a major factor in a strong downturn for chip stocks in the first half of the year.

For more: Why semiconductor stocks are ‘almost uninvestable’ despite record earnings amid a global shortage

“While a digestion phase in PCs and consoles appears likely, and we are budgeting for some caution next year, we believe strength in server (with further market share gains) should allow the company to keep posting solid growth at a now reasonable valuation,” Moore said.

Earlier in the month, AMD forecast average annual revenue growth of about 20% over the next three to four years, while sticking to its second-quarter and annual forecast provided in early May.

Analysts surveyed by FactSet expect revenue of $6.43 billion for the second quarter, compared with AMD’s estimated $6.3 billion to $6.7 billion, and $26.2 billion for the year, based on AMD’s estimate of about $26.3 billion.

AMD shares, at last check, were up about 1%, while the PHLX Semiconductor Index
SOX,
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was down about 1%.

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