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The Ratings Game: AMD ‘is just a different company now,’ and Wall Street is cheering

Advanced Micro Devices Inc. shares rose Wednesday, as analysts described the chip maker’s earnings report as “a potential watershed moment” that proved AMD is a data-center powerhouse following its acquisition of Xilinx Inc.


shares rallied to finish up 9.1% at $99.42 Wednesday, their best day since Nov. 8, when shares rallied 10.1%. The PHLX Semiconductor Index 

finished Wednesday up 3.9%, the S&P 500 index 

rose 3%, and the tech-heavy Nasdaq Composite Index 

advanced 3.2%.

Late Tuesday, AMD posted its first $5 billion-plus quarter and guided for its first $6 billion-plus period as the chip maker’s data-center strategy comes together following the Feb. 14 close of its Xilinx acquisition and offer to buy data-center software company Pensando for $1.9 billion. Additionally, AMD hiked its full-year revenue outlook by $4.8 billion, for guidance $7.1 billion higher than what Wall Street had been forecasting before the report.

“It’s just a different company now,” Cowen analyst Matthew Ramsay said of AMD. Ramsay has an outperform rating and a $160 price target, noting that AMD’s “upside and conservativism” both delivered “exactly where you would want them.”

Acquiring Xilinx brought in so-called field-programmable gate array, or FPGA, chips that can be configured by a customer or a designer after they are made. Those chips, in turn, are used as accelerators in data centers to boost computing power and improve power efficiency in existing physical spaces. 

“Overall, we continue to view adding Xilinx’s programmable logic to AMD’s arsenal positions the company as the only player with scaled CPU, GPU, and programmable logic IP under one roof with a road map to make these technologies memory coherent at the chip/chiplet levels to provide flexible and customizable datacenter solutions,” Ramsay said.

AMD executives showed how focused they are on the data-center category by announcing they will start reporting data center sales as their own business segment, after several years of refusing to break out data center sales. AMD Chief Executive Lisa Su noted that data-center sales now accounted for a “low 20s-percent” of revenue, which came in at a record $5.89 billion, or about $5.3 billion stripping out a partial quarter of Xilinx sales. 

Read: AMD will finally give investors its data-center data as business soars

Providing breakout results for the data center will allow for easier comparison to the chip maker AMD is chasing in that sector, Intel Corp.

Raymond James analyst Chris Caso, who recently hiked his rating on the stock to a “strong buy” with a $160 price target, broke down what the numbers released so far show.

“Comparison with Intel suggests continued AMD share gains in both client compute and datacenter server in the March quarter, and the outlook from each company suggests AMD will continue to gain share in 2022,” wrote Caso, who has a market perform rating on Intel.

In data-center sales, comparing “the entire datacenter businesses at each company,” Caso said AMD gained two points, more than doubling revenue and giving it 18% market share, as Intel’s data-center revenue improved 22% despite the two-point loss.

Analysts went into AMD’s earnings late Tuesday concerned that the chip maker would be susceptible to a weakening PC market following peak sales during the height of the COVID-19 pandemic, but several came out of the conference call noting that executives had “de-risked” those worries.

Read: The pandemic PC boom is over, but its legacy will live on

In client computing, market share was split 82/18 between Intel and AMD, with Intel losing three points, resulting in a 13% decline in revenue for Intel and a 22% revenue gain for AMD, Caso wrote, “highlighting our view that even modest share gains can drive outsized revenue growth for AMD.”

Bernstein analyst Stacy Rasgon, who has an outperform rating and a $150 price target, said this quarter “appears to be a potential watershed moment” for AMD “as they demonstrate the ability to grow right through burgeoning PC weakness while datacenter efforts run roughshod over the competition.”

“At this point AMD’s operating margins are substantially higher than their larger peer [Intel], their cash generation potential is more powerful, their road maps appear more reliable, and their gauge of near-term risks appears far better,” Rasgon said.

AMD reported gross margins of 48% for the first quarter, up from 46% in the year-ago quarter, but down from 50% in the fourth quarter. Without Xilinx, AMD’s gross margin was 51%. AMD, however, hiked its gross margin forecast for the year to 54%, up from a previous 51%, while Intel is forecasting 52% for the year.

Susquehanna Financial analyst Christopher Rolland, who has a positive rating on AMD but lowered his price target to $140 from $160, said that AMD might actually be understating that gross margin forecast.

“During the regulatory process, we believe Xilinx was underinvesting in additional wafer capacity and substrate supply (lead-times have rocketed well beyond 52 weeks here),” Rolland said. “Therefore, 1Q Xilinx revenue may represent a low point for the year, as AMD is able to move some of their own supply over to support this high-profit business, potentially driving margin upside through the year (we also think AMD may have sandbagged full-year [gross margin] guidance).”

Read: The end of one-chip wonders — Why Nvidia, Intel and AMD’s valuations have experienced massive upheaval

Jefferies analyst Mark Lipacis, who has a buy rating and raised his price target to $155 from $145, said he thinks AMD’s July 9 analyst day will be a potential catalyst.

“We expect to hear more from AMD in how it plans to leverage XLNX’s product portfolio especially in 5G and data center; mgmt identified significant revenue synergy opportunity with XLNX’s customers,” Lipacis noted.

Even with the stellar results and outlook, at least 16 analysts covering AMD cut their price targets, after a rough beginning to 2022 on Wall Street pulled down its stock along with other chip makers. The result was an average price target of $137.92 Wednesday morning, down from a previous $145.20, according to FactSet data. Of the 39 analysts covering AMD who are tracked by FactSet, 24 rate the stock the equivalent of a “buy,” while 14 have “hold” ratings and just one calls the stock a “sell.”

Read: Why semiconductor stocks are ‘almost uninvestable’ despite record earnings amid a global shortage

As with a quarter ago, AMD’s report stabilized what amounted to a mixed bag of earnings outlooks in the previous week. Last week, Intel doubled down on its bullish 2022 outlook even though the current quarter is showing signs of weakness and Wall Street is skeptical. Qualcomm Inc.’s 

 outlook was also bullish, but analysts could see support in the short term given strength in its handset business.

Late Monday, NXP Semiconductors NV 
 which has a big presence in the auto chip market, offered a bullish forecast citing demand that outstripped supply, while Texas Instruments Inc. 

have played it safe with a cautious outlook, believing lockdowns will affect the manufacturing operations of its customers.

Meanwhile, chip-equipment makers Lam Research Corp. 
KLA Corp. 
and ASML Holding NV 

all reported that supply-chain problems are hampering sales in a high-demand environment.

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