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AMD’s Earnings Could Be Good Next Week — Just Not Good Enough for “Buy” Rating

With a 31 price-to-earnings ratio ($125 billion in market capitalization divided by $4 billion in trailing net income), and consensus expectations of 39% annualized earnings growth over the next five years (which works out to a 0.8 PEG ratio by the way), semiconductor company Advanced Micro Devices (AMD) looks like the very definition of a “Growth At a Reasonable Price,” or “GARP” stock.

And yet, investors may wonder: Why won’t Deutsche Bank recommend buying it?

In a note previewing AMD’s Q4 earnings report, due out next Tuesday, Feb. 1, Deutsche Bank 5-star analyst Ross Seymore explains why despite AMD having a lot going for it, and despite the very high likelihood that AMD is going to report some tremendous sales and earnings growth next week, he still can’t quite bring himself to recommend the stock — and rates AMD a “hold.”

“We expect AMD to deliver a solid report/guide and to provide a robust 2022 outlook on its upcoming earnings call,” predicts Seymore. “Cloud demand” for AMD products remains “robust.” And the fact that Intel reported “lackluster trends” in cloud computing, observes the analyst, was less reflective of any broad trend in the semiconductor industry. Rather, it was “largely the result of continued share shift towards AMD.”

Or put more plainly, AMD is beating Intel in the cloud, stealing Intel’s market share — and Intel’s weakness this is a good thing for AMD, not a bad thing.

Accordingly, Seymore is expecting to see relatively strong results from AMD next week, and strong guidance as well. Although he only expects AMD to meet consensus forecasts for earning ($0.76 per share pro forma), he believes that 15% growth in the company’s Enterprise Embedded and Semi-Custom segment (EESC) segment will help lift Q4 revenue past consensus targets of $4.51 billion, to $4.56 billion instead.

Gross profit margins, on the other hand, are expected to be only 49.5% — in line with management forecasts.

On the subject of guidance, Seymore expects AMD to say that:

Revenues will slump only slightly, sequentially, in Q1 2022, and rise 29% year over year to $4.45 billion.

Gross margins will hold mostly steady at 49.4% in the second quarter.

And pro forma profits will be about $0.71 — slightly ahead of Street projections for $0.70.

Farther out, Seymore thinks investors can expect AMD to continue to rely heavily on EESC growth, as well as Data Center graphics processing units (GPUs) and to a lesser extent Client GPUs, to power 25% or better full year sales growth. Gross margins should hold steady all year long at 49.5% or so, and on the bottom line, the analyst sees AMD ending this year with $3.30 per share in pro forma profits, slightly behind Street predictions of $3.34.

All that being said, Seymore believes that investors in general are leery of investing in growth stocks right now, and therefore may not give AMD full credit either for the growth it produces in Q4, or what it promises in Q1 2022 — or indeed, the growth it expects to achieve over the course of the year. Calling the shares “sufficiently valued at current levels,” Seymore is content to sit tight with a “hold” rating, and perhaps reevaluate after new numbers come out next week. (To watch Seymore’s track record, click here)

So, that’s Deutsche Bank’s view, let’s turn our attention now to rest of the Street: AMD’s 12 Buys and 5 Holds coalesce into a Moderate Buy rating. There’s plenty of upside – 51% to be exact – should the $155.73 average price target be met over the next months. (See AMD stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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