AMD Loses a Buy Rating, Thanks to a Terrible PC Market

By all indications, Advanced Micro Devices (AMD -2.39%) is having a tougher time coping with crashing demand for PCs than rival Intel (INTC -1.16%). That’s the opposite of what Bernstein analyst Stacy Rasgon predicted early last year. When AMD earned a buy rating from Bernstein last February, that rating was partly based on the idea that AMD would hold up better in a tough PC market.

That view turned out to be wrong. Rasgon knocked down his rating on AMD to market perform on Tuesday, citing a deteriorating PC market and the fact that AMD is being hit harder by the downturn than Intel. Rasgon also lowered his price target on the stock from $95 to $80.

Deep discounts

If you look at retail prices of AMD’s PC CPUs, it’s not a pretty picture. The company’s latest Ryzen 7000 processors are currently selling at steep discounts to suggested prices on Amazon.com. The mainstream Ryzen 5 7600X, for example, can be bought for 17% less than the launch price, while the high-end Ryzen 9 7900X goes for 23% below launch price. Going back to previous-generation chips, discounts are even steeper.

Intel’s CPUs, on the other hand, aren’t seeing the same level of discounts. The i5-13600K, a member of the latest Raptor Lake family, sells right in line with Intel’s listed price. The high-end i9-13900K is actually selling for a bit more than Intel’s listed price. While there are differences between the listed prices AMD and Intel publish, it’s safe to say that AMD’s Ryzen chips are running into demand problems.

There are three things at play here. First, demand for PCs is incredibly weak. Global PC shipments plunged 28.5% year over year in the fourth quarter, according to Gartnerand shipments will likely decline again in 2023. Consumer demand has been weak for a while, but now, even commercial demand is faltering.

Second, this rapid decline in demand has led the PC supply chain to aggressively reduce inventories. For AMD and Intel, that means PC manufacturers and other customers are buying CPUs at a slower rate than end-market demand for PCs would dictate. In AMD’s third quarter, client segment revenue plunged 40%, thanks to these harsh inventory corrections.

Third, AMD’s latest Ryzen chips were likely priced too high to begin with. Intel’s Raptor Lake chips generally outperform AMD’s Ryzen 7000 chips, and Intel has been fairly aggressive on pricing. On top of that, motherboards for AMD’s latest chips tend to be expensive, raising the cost of building a full system. Rasgon noted that Intel may be making the situation worse by over shipping.

Rasgon is also worried about AMD’s gross margins. While the consensus is for improving gross margins in the second half of the year, Rasgon doesn’t think that will happen unless the PC market improves. I warned about AMD’s gross margins last month.

A tough year ahead

While strength in AMD’s server-chip business should help offset some of the weakness in the PC business, it probably won’t prevent an eventual revenue and earnings decline. AMD’s organic revenue, which excludes revenue gained by the acquisition of Xilinx, has already flatlined. Once AMD laps that acquisition in February, the benefit to revenue growth will disappear.

AMD will report its fourth-quarter results on Tuesday, Jan. 31, while Intel is scheduled to report this Thursday. Neither company is going to report particularly good results, but AMD is at risk of disappointing investors as the tumbling PC market ravages one of its core businesses.

Timothy Green has positions in Intel. The Motley Fool has positions in and recommends Advanced Micro Devices and Intel. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short January 2025 $45 puts on Intel. The Motley Fool has a disclosure policy.

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