Should You Buy AMD Stock After a 35% Drop in 2022?

Shares of Advanced Micro Devices (NASDAQ: AMD) are down over 35% YTD on concerns that the weaker consumer sentiment may weigh on demand for hardware.

Barclays Accelerates AMD Stock Losses

Barclays analyst Blayne Curtis recently downgraded AMD’s stock to Equal Weight from Overweight and reduced the price target to $115 from $148, sending its shares tumbling 5%. 

In his note to investors, Curtis wrote the chipmaker’s growth “needs a pause” ahead of potential cyclical risks in 2023.

“AMD still looks positioned to gain share this year in both the client and server markets, and while we do see upside to the 31% growth target this year, where we have an issue is for 2023, as we see cyclical risk across several end markets” including gaming, PC, and broad-based, all of which are currently performing at high levels, which could harm AMD’s growth.

Since the Barclays call, AMD stock is down roughly 10%.

New Acquisition

The semiconductor company said it agreed to purchase the cloud startup Pensando for $1.9 billion to reinforce its data center offerings and leverage the rapidly growing demand for cloud and enterprise solutions.

Founded by four former Cisco engineers, Pensando is a California-based startup that develops new edge solutions and programmable processors for cloud and enterprise computing. Its clients include Goldman Sachs and Microsoft’s cloud business Azure, among others.

Pensando’s platform allows companies to operate similar to cloud computing data centers such as Amazon Web Services (AWS). The cloud computing sector is experiencing a boom as it enables customers to order as much computing power as required in a matter of minutes. 

AMD is facing serious competition in the profitable data center chip sector, with Intel and Nvidia as its main rivals.

In March, Nvidia introduced a new chip developed to accelerate AI operations in data centers. Moreover, Nvidia released a new chip to speed up artificial intelligence functions in data centers.

AMD’s deal with Pensando is expected to close in the second quarter of 2022. The startup’s CEO Prem Jain and her entire team will be joining AMD’s Data Center Solutions Group.

AMD finalized its acquisition of Xilinx in February in a record chip industry deal of $50 billion, reinforcing the company’s position to compete with Intel and other rivals in the data center chip sector. 

AMD announced its plans to buy Xilinx in October 2020 in a deal that was initially valued at $35 billion. However, the rise in AMD’s stock price has elevated the price tag of the deal.  

How Did AMD Perform in Q4 2021?

The chipmaker reported better-than-expected Q4 2021 earnings and issued a robust sales outlook for this year.

AMD reported adjusted Q4 EPS of $0.92, beating the consensus estimates of $0.76 per share and up 26% from the year-ago period. Revenue came in at $4.83 billion in the period, above the expected $4.53 billion and up 49% year-over-year.

The company said it expects 2022 sales to hit $21.5 billion, well above the analysts’ estimates of $19.26 billion, and up 31% from 2021 sales. It anticipates $5 billion in sales in Q1 2022, fueled by strong demand for server and PC processors.

AMD’s sales rose 68% last year, with gross margin surging to 48%. The company has been capitalizing on robust PC and electronics sales over the past two years, launching new chips that are significantly more powerful than its predecessors. 

The company’s revenue in its cloud and graphics business rose by 32% to $2.6 billion, driven by solid sales of its Ryzen processors and Radeon graphics processing units. AMD’s Embedded, Enterprise, and Semi-custom segment sales jumped 75% to $2.2 billion thanks to strong demand for server chips and game consoles. 

“We expect [semi-custom] revenue to grow this year driven by continued strong demand for the latest Microsoft and Sony consoles,” said AMD CEO Lisa Su, adding the new console upgrade is outshining prior versions.  

Conclusion

Shares of AMD are down 35% YTD with some investors concerned about slowing demand. AMD shares experienced strong growth last year, hence some traders may see the ongoing pullback as an opportunity to buy more AMD stock given the company’s robust financials.

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