Why advanced microdevices fell today

What happened

Shares of Advanced micro-devices AMD -3.45% fell again on Wednesday, down 5.1% as of 12:48pm ET.

While the stock fell sharply yesterday on poor consumer sentiment from the Conference Board, another decline followed today as a prominent semiconductor analyst lowered its industry-wide price targets.

And then

On Wednesday, bank of America analyst Vivek Arya lowered his price target for AMD, lowering it from $160 to $110, though he kept his buy recommendation on stocks. Arya actually seems optimistic about AMD compared to the rest of the industry, but the AMD price target cut was part of a broader industry-wide cut, including Nvidia NVDA -2.75%, which was also kept at purchase. However, these two fared relatively well; Arya has actually downgraded its ratings for several other semi-names to neutral or below par, so you could argue that AMD actually outperformed its industry peers in its analysis.

The reason for the sector-wide downgrade was purely macroeconomic, as Arya expects a GDP slowdown or recession to trigger a semiconductor downturn. His note read: “All told, we have lowered our forecast for half sales of CY22E to $608 billion (9.5% yoy vs. 13% prior) and CY23E to $604 billion (-1% yoy vs 7% prior) This includes -4% yoy decline in non-memory chips, similar to previous periods of 2-3% global GDP growth, likely next year.”

Meanwhile, US GDP data for the first quarter was even revised slightly lower today on their third revision, which showed a decline of 1.6% from the initial estimate of 1.5%. The slightly weaker reading comes even as central bankers are aggressively raising interest rates to tame inflation, which some investors believe will lead to a recession

What now

Certainly, a recession probably wouldn’t be good for any sector of the economy, and in the past, semiconductors were even more economically sensitive than others. However, semiconductor investors can take comfort in the fact that even Arya doesn’t think a semi-downturn will be as bad as previous down cycles. He continued: “Since 1995, the average half downturn has resulted in sales declines of about 9%, including 15% in memory, but only 5%-7% in non-memory, core semi-finished products. Today, while a macroeconomic slowdown could lead to We are seeing a unique price leverage that provides some support for semi-finals compared to historical levels.”

AMD is well positioned today as its chips are ahead of rival Intel‘s INTC -1.30% the past few years. Since Intel has been the dominant processor manufacturer for many years, AMD has the potential to gain market share, perhaps offsetting an industry-wide weakness should it happen. Note that last week, other analysts at JP Morgan predicted that AMD could double its server market share next year, potentially reaching 30%-40% of server chip sales, up from 20% today.

AMD’s business has grown tremendously in recent years, but the stock has been a bit expensive. However, with stocks now close to 30 times earnings and what looks set to be a solid year of growth in 2022, AMD’s stock looks attractive for the first time in a long time – although many of the semiconductor sector is also.

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