Advanced Micro Devices (AMD) Just Won a Price Target Boost; Here’s Why

All parts of Advanced Micro Devices’ (NASDAQ:AMD) business are running at a strong pace. During the latest quarter, revenues spiked by 53% to $1.76 billion and gross margins improved by more than 3%. But perhaps the biggest driver is the data center segment – – Epyc units and revenue grew by more than 50% and Epyc sales to hyper-scalers doubled sequentially.

MKM analyst Ruben Roy believes the overall demand environment across data center end markets will remain strong over the next several quarters. As such, the analyst revised his valuation metrics for AMD, reiterating a Neutral rating, while boosting his price target for the stock to $20.00 (from $13.50), which still implies a potential downside of 21% from today’s closing price. (See Stock Recommendations from Ruben Roy)

Roy opined, “We are raising our estimates and price target on AMD as PC and data center end market trends remain strong and, admittedly, our previous estimates did not reflect the company’s new product momentum. Additionally, we expect AMD’s announcement this week regarding its intention to move all 7nm products to TSMC to benefit the company’s margin structure, longer-term. With our new 2019 EPS estimate of $0.66, we raise our Fair Value estimate to $20.”

However, “While we continue to appreciate AMD’s execution, strong share price appreciation (up roughly 155% from April lows) and valuation (trading at 38x our new 2019 EPS estimate), reflect high expectations, in our view,” the analyst added.

Net net, Wall Street sizes up AMD as a ‘Moderate Buy’ stock, as the bulls edge out the cautious on the chip giant. In the last 3 months, AMD has received 10 bullish ratings versus 9 analysts hedging their bets, and two bears. Yet, the consensus price target hints at caution baked into expectations here. The 12-month average price target of $19.06 reflects a downside potential of 24%.

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