Shares of Advanced Micro Devices Inc. dropped sharply in active trade Tuesday, after Barclays turned bearish a week before the graphics chip maker reports quarterly results, citing a valuation that it believed was out of whack.
Analyst Blayne Curtis cut his rating to a rare underweight from equal weight while keeping his stock price target at $9, which is 33% below current levels. Only 15% of the companies covered by Barclays are rated underweight.
The stock (AMD) fell as much as 4.7% intraday, before paring some losses to close down 2.3% at $13.48. Volume hit 77.9 million shares, enough to make the stock the most actively traded on the Nasdaq exchange, and the third-most active stock on all the major exchanges.
Curtis said he has done regular channel checks since the fall, and despite the launch of new chips, has heard “little to no material traction” with original design manufacturers, which he believes is the best gauge of future success.
“After the launch of both Purley and Epyc and seeing third party benchmarks for both, we believe the rubber is meeting the road and gain conviction Epyc will not gain enough traction to support current valuation,” Curtis wrote in a note to clients.
He said he has heard of some interest from original equipment manufacturers, but that doesn’t necessarily indicate strong demand, and businesses usually take over a year to evaluate chips before buying.
Meanwhile, a rapidly growing semiconductor stock might normally have a forward price-to-earnings ratio of a little over 20, but Curtis said AMD’s P/E ratio was 45, even though the company’s relatively low-margin profile would suggest a lower-than-average valuation. At current levels, he wrote that the P/E ratio discounts a long-term target for earnings per share of 75 cents, “which we have difficulty getting anywhere near.”
AMD is scheduled to reveal second-quarter results on July 25, after the market closes. Analysts surveyed by FactSet are currently expecting, on average, a break-even quarter. The full-year EPS consensus estimates are just 7 cents for 2017 and 29 cents for 2018. Read more about how options traders are preparing for earnings.
Curtis acknowledged that demand for AMD’s graphics processing units (GPUs) from cryptocurrency miners was a “wild card,” but he believes that all the recent buzz is just a short-term demand stimulus instead of a long-term trend.
BMO Capital analyst Ambrish Srivastava echoed those concerns, writing in a note Tuesday, “we are not at all bullish on the sustainability of this demand.” He said he sees similarities to the spike in demand seen during the 2013-to-2014 period, when a cryptocurrency boom led to a “more than a one-quarter bust for AMD.”
“As profitability continues to decrease across the board for GPU miners...and with a potential change of how miners are compensated in Ethereum and potentially other cryptocurrencies, we could see a scenario developing where GPU-based mining could suffer yet another collapse, forcing miners to sell their newly acquired graphics cards into the secondhand market, with a ripple effect across the entire supply chain,” Srivastava wrote.
The stock has run up 18.9% year to date, after soaring nearly fourfold last year. In comparison, the PHLX Semiconductor Index (SOX) has climbed 21.7% so far this year, while the Nasdaq Composite Index (COMP) rallied 17.9% and the S&P 500 index (SPX) has gained 9.9%.
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