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Do More U.S. Restrictions on China Make AMD a Risky Bet?
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Advanced Micro Devices (AMD - Free Report) shares have declined more than 14% in the past week. The chipmaker's shares suffered heavy losses following a Bloomberg news that the U.S. government is reportedly planning to tighten restrictions on chip exports to China. The United States already prohibits the sale of high-end chips above a certain capability threshold in China.
AMD shares declined 10.2% on Jul 17 on the heels of the Bloomberg report. It further declined by 2.3% to close at $155.77 on Jul 18. Year to date, AMD shares have gained 5.7%, underperforming the broader Zacks Computer & Technology sector’s return of 20.8%.
The Biden administration’s tightening plan sent shockwaves throughout the semiconductor industry. Apart from AMD, shares of NVIDIA (NVDA - Free Report) , Micron Technology (MU - Free Report) , Marvell Technology (MRVL - Free Report) and ASML dropped 7.09%, 6.3%, 10.1% and 12.7%, respectively, on Jul 17. On Jul 18, while both NVIDIA and Marvell shares recovered slightly, both MU and ASML continued their drop along with AMD.
Among these semiconductor bellwethers, Marvell has the most exposure to China, 45% of total revenues, followed by ASML, NVIDIA and AMD, generating roughly 41%, 20% and 15% of revenues, respectively. Micron generates close to 10% of revenues from China. (Read More: Chip Stocks Tumble as US Plans to Tighten China Restrictions).
Year-to-Date Price Performance
Image Source: Zacks Investment Research
AMD Stock Suffers From Stiff Competition
AMD is suffering from stiff competition from NVIDIA. Both stocks have been the darlings of investors, driven by the massive proliferation of AI that has created a strong demand for GPU chips required to power AI models.
However, the challenging macroeconomic environment and rising uncertainties over the upcoming Presidential elections don’t bode well for AMD stock, given its smaller size and GPU market share. These factors have also made investors skeptical of its ability to dethrone NVIDIA.
NVIDIA’s strategy to release new AI chip models annually instead of its previous two-year update timeline intensifies competition for AMD.
AMD’s near-term prospects further suffer from weakness in the Embedded and Gaming segments.
For second-quarter 2024, the Embedded and the Gaming segment revenues are expected to decline by a significant double-digit percentage year over year. Sequentially, Embedded segment revenues are expected to be flat, while the Gaming segment revenues are expected to decline by a significant double-digit percentage.
The Zacks Consensus Estimate for second-quarter Embedded revenues is currently pegged at $845.89 million, indicating a 45.7% year-over-year decline. The consensus mark for Gaming is pegged at $657.24 million, suggesting a massive 165.4% decline.
Estimate Revisions Witnessing Upward Movement
AMD expects second-quarter 2024 revenues to be $5.7 billion (+/-$300 million). At the mid-point of the revenue range, this represents year-over-year growth of approximately 6% and sequential growth of approximately 4%.
The Zacks Consensus Estimate for second-quarter 2024 revenues is pegged at $5.71 billion, indicating 6.54% growth year over year. The consensus mark for earnings is pegged at 67 cents per share, up a penny over the past 30 days.
AMD’s long-term prospects are bright, given robust spending on AI chips.
Gartner expects revenues from AI semiconductors to hit $71.25 billion in 2024, up 33% over 2023. For 2025, revenues are expected to reach $91.96 billion, up roughly 29% over the 2024 estimate. More importantly, in 2024, AI chips revenue from compute electronics is projected to total $33.4 billion, which will account for 47% of total AI semiconductors revenue.
This bodes well for AMD as its portfolio expansion initiatives are making it well-positioned in the data center market as well as in the growing AI-enabled consumer PC market over the long haul.
New offerings like the Instinct MI325X accelerator are helping to expand AMD’s footprint in the data center market. AMD has launched the Ryzen AI 300 Series, the third generation of AMD AI-enabled mobile processors, and Ryzen 9000 Series processors for laptop and desktop PCs.
AMD is also benefiting from its strong partner base. At Computex, Microsoft, HP, Lenovo and Asus unveiled new PCs powered by third-gen AMD Ryzen AI 300 Series processors and AMD Ryzen 9000 Series desktop processors.
The recently announced Silo AI acquisition expands AMD’s AI ecosystem. The company has been on an acquisition spree to strengthen its AI ecosystem. In the past 12 months, it has spent $125 million on a dozen of acquisitions. Nod.ai and Mipsology are some other notable acquisitions in the recent past.
AMD Stock Overvalued
AMD’s Value Style Score of F indicates a stretched valuation at this moment.
AMD stock is trading at a premium to the Zacks Electronics - Semiconductors industry. Its forward 12-month P/E of 35.54X is higher than the industry’s 34.56X.
P/E Ratio (F12M)
Image Source: Zacks Investment Research
Conclusion
AMD’s near-term prospects are dull, given the weakness in the Embedded and Gaming segments amid stiff competition from NVIDIA. AMD has a Growth Style Score of D, which makes the stock unattractive for growth-oriented investors.
AMD currently has a Zacks Rank #3 (Hold), suggesting that it may be wise to wait for a more favorable entry point in the stock. However, investors who already own the stock may expect the company's growth prospects to be rewarding over the long term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Do More U.S. Restrictions on China Make AMD a Risky Bet?
Advanced Micro Devices (AMD - Free Report) shares have declined more than 14% in the past week. The chipmaker's shares suffered heavy losses following a Bloomberg news that the U.S. government is reportedly planning to tighten restrictions on chip exports to China. The United States already prohibits the sale of high-end chips above a certain capability threshold in China.
AMD shares declined 10.2% on Jul 17 on the heels of the Bloomberg report. It further declined by 2.3% to close at $155.77 on Jul 18. Year to date, AMD shares have gained 5.7%, underperforming the broader Zacks Computer & Technology sector’s return of 20.8%.
The Biden administration’s tightening plan sent shockwaves throughout the semiconductor industry. Apart from AMD, shares of NVIDIA (NVDA - Free Report) , Micron Technology (MU - Free Report) , Marvell Technology (MRVL - Free Report) and ASML dropped 7.09%, 6.3%, 10.1% and 12.7%, respectively, on Jul 17. On Jul 18, while both NVIDIA and Marvell shares recovered slightly, both MU and ASML continued their drop along with AMD.
Among these semiconductor bellwethers, Marvell has the most exposure to China, 45% of total revenues, followed by ASML, NVIDIA and AMD, generating roughly 41%, 20% and 15% of revenues, respectively. Micron generates close to 10% of revenues from China. (Read More: Chip Stocks Tumble as US Plans to Tighten China Restrictions).
Year-to-Date Price Performance
AMD Stock Suffers From Stiff Competition
AMD is suffering from stiff competition from NVIDIA. Both stocks have been the darlings of investors, driven by the massive proliferation of AI that has created a strong demand for GPU chips required to power AI models.
However, the challenging macroeconomic environment and rising uncertainties over the upcoming Presidential elections don’t bode well for AMD stock, given its smaller size and GPU market share. These factors have also made investors skeptical of its ability to dethrone NVIDIA.
NVIDIA’s strategy to release new AI chip models annually instead of its previous two-year update timeline intensifies competition for AMD.
AMD’s near-term prospects further suffer from weakness in the Embedded and Gaming segments.
For second-quarter 2024, the Embedded and the Gaming segment revenues are expected to decline by a significant double-digit percentage year over year. Sequentially, Embedded segment revenues are expected to be flat, while the Gaming segment revenues are expected to decline by a significant double-digit percentage.
The Zacks Consensus Estimate for second-quarter Embedded revenues is currently pegged at $845.89 million, indicating a 45.7% year-over-year decline. The consensus mark for Gaming is pegged at $657.24 million, suggesting a massive 165.4% decline.
Estimate Revisions Witnessing Upward Movement
AMD expects second-quarter 2024 revenues to be $5.7 billion (+/-$300 million). At the mid-point of the revenue range, this represents year-over-year growth of approximately 6% and sequential growth of approximately 4%.
The Zacks Consensus Estimate for second-quarter 2024 revenues is pegged at $5.71 billion, indicating 6.54% growth year over year. The consensus mark for earnings is pegged at 67 cents per share, up a penny over the past 30 days.
Advanced Micro Devices, Inc. Price and Consensus
Advanced Micro Devices, Inc. price-consensus-chart | Advanced Micro Devices, Inc. Quote
AMD’s Robust Portfolio Aids Long-Term Prospects
AMD’s long-term prospects are bright, given robust spending on AI chips.
Gartner expects revenues from AI semiconductors to hit $71.25 billion in 2024, up 33% over 2023. For 2025, revenues are expected to reach $91.96 billion, up roughly 29% over the 2024 estimate. More importantly, in 2024, AI chips revenue from compute electronics is projected to total $33.4 billion, which will account for 47% of total AI semiconductors revenue.
This bodes well for AMD as its portfolio expansion initiatives are making it well-positioned in the data center market as well as in the growing AI-enabled consumer PC market over the long haul.
New offerings like the Instinct MI325X accelerator are helping to expand AMD’s footprint in the data center market. AMD has launched the Ryzen AI 300 Series, the third generation of AMD AI-enabled mobile processors, and Ryzen 9000 Series processors for laptop and desktop PCs.
AMD is also benefiting from its strong partner base. At Computex, Microsoft, HP, Lenovo and Asus unveiled new PCs powered by third-gen AMD Ryzen AI 300 Series processors and AMD Ryzen 9000 Series desktop processors.
The recently announced Silo AI acquisition expands AMD’s AI ecosystem. The company has been on an acquisition spree to strengthen its AI ecosystem. In the past 12 months, it has spent $125 million on a dozen of acquisitions. Nod.ai and Mipsology are some other notable acquisitions in the recent past.
AMD Stock Overvalued
AMD’s Value Style Score of F indicates a stretched valuation at this moment.
AMD stock is trading at a premium to the Zacks Electronics - Semiconductors industry. Its forward 12-month P/E of 35.54X is higher than the industry’s 34.56X.
P/E Ratio (F12M)
Conclusion
AMD’s near-term prospects are dull, given the weakness in the Embedded and Gaming segments amid stiff competition from NVIDIA. AMD has a Growth Style Score of D, which makes the stock unattractive for growth-oriented investors.
AMD currently has a Zacks Rank #3 (Hold), suggesting that it may be wise to wait for a more favorable entry point in the stock. However, investors who already own the stock may expect the company's growth prospects to be rewarding over the long term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.