Semiconductor giant Advanced Micro Devices, Inc. (AMD) operates through two segments: Computing and Graphics; and Enterprise, Embedded, and Semi-Custom. The company’s products include x86 microprocessors as accelerated processing units, discrete and integrated graphics processing units (GPUs), servers and embedded processors, and semi-custom System-on-Chip (SoC) products.

AMD’s third-quarter 2022 earnings declined significantly due to softening PC market and substantial inventory reduction actions across the PC supply chain. The company reported revenue and gross profit of $5.57 billion and $2.78 billion, up 29% and 33% year-over-year, respectively. However, its net income declined 93% year-over-year to $66 million, while its EPS came in at $0.04, down 95% year-over-year.

Growing export regulations are impacting AMD. In October, new export restrictions were imposed on U.S. chipmakers to prevent American technology from advancing China’s military power. The rules will require U.S. companies to obtain a license from the Commerce Department to export advanced chips and chip-manufacturing equipment to Chinese entities.

Investment analysts at Oppenheimer lowered their fiscal 2022 earnings per share estimates for AMD. Oppenheimer analyst R. Schafer now expects the company to post earnings per share of $2.95 for the year, down from their prior estimate of $3.12. Moreover, KeyCorp lowered their price target on AMD from $100 to $85 and set an “overweight” rating on the stock.

Due to investors’ concerns over rising interest rates and declining demand, shares of AMD have plunged 51.8% year-to-date to close the last trading session at $72.37. The stock is currently trading 56% below its 52-week high of $164.46, which it hit on November 30, 2021.

While analyst sentiment about AMD looks bearish, several large-scale investors are betting big on the stock. Vanguard Group, Inc. owns approximately 133.65 million AMD shares, representing nearly 8.29% of the outstanding shares. BlackRock Inc. (BLK) holds about 116.37 million AMD shares (7.22% of outstanding shares).

In addition, State Street Corp. (STT) owns more than 65.12 million AMD shares (4.03%), and T Rowe Price (TROW) holds 53.56 million shares (3.32%).

Here is what I think could influence AMD’s performance in the upcoming months:

Disappointing Financials

AMD’s operating expenses increased 112.6% year-over-year to $2.43 billion in the fiscal 2022 third quarter ended September 24, 2022. The company’s operating loss was $64 million, compared to an operating income of $948 million in the prior-year period. Its net income declined 93% year-over-year to $66 million, while its EPS came in at $0.04, down 95% year-over-year.

Furthermore, as of September 24, 2022, the company’s current liabilities came in at $6.69 billion, compared to $4.24 billion as of December 25, 2021.

Weak Growth Prospects

Analysts expect revenues to increase 14.7% year-over-year to $5.53 billion in the fiscal 2022 fourth quarter (ending December 2022). However, the company’s earnings per share for the ongoing quarter is expected to come to $0.67, indicating a decline of 26.7% year-over-year.

In addition, the company's revenue and earnings per share estimates of $5.63 billion and $0.71 for the fiscal 2023 first quarter (ending March 2023) indicate a 4.3% and 37.1% decline year-over-year, respectively.

Frothy Valuation

In terms of forward non-GAAP P/E, AMD is currently trading at 20.68x, 6.6% higher than the industry average of 19.40x. The stock’s forward EV/Sales multiple of 4.84 is 75.5% higher than the industry average of 2.76. Also, its forward EV/EBITDA of 14.17x is 11.8% higher than the industry average of 12.68x.

In addition, the stock’s forward EV/EBIT multiple of 17.97 compares with the industry average of 16.82. Its forward Price/Sales of 4.96x is 89.6% higher than the industry average of 2.62x.

POWR Ratings Reflect Bleak Prospects

AMD has an overall D rating, equating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AMD has an F grade for Stability, consistent with its 1.70 beta. In addition, the stock has a D grade for Growth and Sentiment, in sync with its unfavorable analyst estimates.

AMD is ranked #87 out of 91 stocks in the Semiconductor & Wireless Chip industry. Click here to access AMD’s POWR ratings for Value, Momentum, and Quality.

Bottom Line

AMD’s top-line growth didn’t translate to bottom-line performance in the last reported quarter. Furthermore, weakening demand, supply chain disruptions, and growing export restrictions would likely impact the company’s revenues and earnings in the upcoming quarters.

A shrinking economy and short-term market jitters sent AMD down by more than 55% from its 52-week high. The stock is currently trading below its 50-day and 200-day moving averages of $66.55 and $90.86, indicating a downtrend. So, despite experiencing solid hedge fund sentiment lately, it could be wise to avoid this stock now.

How Does Advanced Micro Devices, Inc. (AMD) Stack up Against Its Peers?

AMD has an overall POWR Rating of D, equating to a Sell rating. Therefore, one might want to consider investing in other Semiconductor & Wireless Chip stocks with an A (Strong Buy) rating: STMicroelectronics N.V. (STM), United Microelectronics Corp. ADR (UMC), and Renesas Electronics Corporation (RNECF).

AMD shares rose $2.57 (+3.55%) in premarket trading Monday. Year-to-date, AMD has declined -49.71%, versus a -15.12% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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