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Although AMD has seen better days, the stock had quite a rally in the first half of the year. Propped up by encouraging console design wins, AMD gained 83 percent this year, but now it is tumbling back again.
On Thursday shares of AMD were down 14.4 percent, after Goldman Sachs analyst James Covello cut his rating to Sell from Neutral. Although Covello identified some positive trends, such as the console design wins, he went on to conclude that AMD is overpriced and very likely to lose market share in 2014..
“The stock is trading at 22X our new 2014 CY EPS estimate as the gaming opportunity only partially offsets the continued secular challenges in the company’s core PC business (we estimate that the PC business will generate 45% of the company’s 2013 revenue),” Covello wrote.
Although Covello noted that AMD would probably do well in graphics, the rest of the business is facing serious problems. He believes AMD will continue to lose market share in the core PC market to Intel, while at the same time facing more pressure from ARM outfits such as Qualcomm in the low-end.
“We assume AMD’s share of PC client processors declines to 13% in 2014 from 17% in 2012. We believe our view on AMD’s share in the PC client business is below consensus. We expect AMD will lose further share in the performance areas of the market to Intel,” he concluded.
Covello thinks that global gaming revenue in 2014 could hit $960 billion and that overall revenue in 2014 could pass the $5.5 billion mark. The figures aren’t all that bad. In fact, Covello raised his projected revenue for 2013 from $4.57 billion to $4.92 billion. Some of his numbers are above the Street’s consensus.
However, not everyone shares Covello’s gloomy outlook. Dan Niles of AlphaOne Capital Management told Barrons that AMD is in a much better place than last year. Niles was short on AMD all last year, but now he is long again.
“If they’re saying the valuation is too high, that’s a bet I’ll take every time,” he said.
Niles also pointed out that AMD has switched to TSMC for much of its production, which means Intel doesn’t have much of an edge in manufacturing. GlobalFoundries (GloFo) is still in the game and AMD is sitting on six years worth of high-volume, low-margin console deals.
One of the reasons AMD might be looking so much worse than Intel is the fact that its market expectations are more realistic. Intel expects the PC market to rebound this year, while AMD thinks we’re looking at a one to two percent decline in PC shipments. If recent PC shipment figures are correct, AMD’s pessimistic numbers are probably closer to reality.