Following Intel's disaster, Wall Street is worried about chipmakers in particular

Following Intel's terrible earnings results, Wall Street analysts are worried about Advanced Micro Devices.

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Intel missed both top-line and bottom-line estimates in its earnings release on Thursday and forecast a weaker first quarter than expected.

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Analysts are wondering if AMD's earnings will show similar weakness when it releases its earnings report on Tuesday. In early trading on Monday, shares of the chipmaker fell nearly 2.5%.

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In a Monday note, Morgan Stanley analyst Joseph Moore writes, “We expect near-term weakness in the data center to weigh on the [first-quarter] outlook, and our initial assumption that the company can guide the full year to roughly consensus numbers could be challenged given Intel's issues and a new CFO." Nevertheless, Moore writes that the company still has opportunities..”

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Morgan Stanley ranked AMD as its top pick in December, knowing the risks involved.

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As Moore points out, "that risk actually looms quite a bit larger in the face of recent upgrades, share price appreciation, and the surprising magnitude of inventory excess at competitor Intel," he said. In spite of this, we still think that full year numbers will be reasonable, and that the only near-term risk or uncertainty will be in the data center space, while the PC client, gaming, and embedded numbers are already at a reasonable level.

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According to the analyst, AMD was the worst-performing large-cap semiconductor last year, but its competitive position has improved despite weak end markets.

Estimates of earnings

While Morgan Stanley expects AMD's first-quarter guidance to be weak, it still rates the shares overweight and has a $77 price target.

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“We believe that estimates have come down substantially, with consensus numbers indicating a 50% decline in the client business in the first half of this year, followed by a return to a 2019 run rate for PCs, which we consider conservative given AMD's market share gains over the past few years,” Moore said.

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During the month of December, Morgan Stanley expects revenue to be $5.54 billion, down 0.4% on a quarterly basis and up 14.8% on a year-over-year basis. There is consensus on Wall Street that it will bring in $5.55 billion, which is just above its own estimate.

The Bank of America analyst Vivek Arya wrote in a note dated Sunday that "we expect AMD's Q4 outlook to be in line, but the Q1 outlook to be weak following the shocking guidance from competitors INTC regarding continued PC and server inventory concerns."

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In addition, the bank explained that this will be the first earnings call under the new chief financial officer, Jean Hu. According to Bank of America, AMD's analyst call is expected to focus on the full-year outlook for sales growth and on the company's data center and gross margins going forward.

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Susquehanna also expects AMD's fourth-quarter results to be in the lower end of the company's range and a disappointing first-quarter forecast.

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“The following is our short-term thesis about AMD: OEMs have lots of unused Intel PC C CPU inventory they need to use for upcoming builds, which will greatly skew market share against AMD, causing their CPU inventory issues to linger and sell-in to remain depressed," Christopher Rolland wrote in a note on Monday.

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AMD also has some positives to point to, including the Genoa chip, which will help boost the company's revenue.

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“AMD is not immune to an enterprise slowdown, but Genoa's performance gap over Sapphire Rapids should allow it to overcome a softer backdrop,” Rolland said.

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There is also evidence that AMD has surged nearly 30% since its last earnings report and has outperformed the broader semiconductor index, which could mean that the bar has been set a little higher for its performance in the future, Rolland said. As a result, he maintained the stock's positive rating.  

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A positive outlook

There is still a positive outlook for AMD's stock even though there are some concerns about AMD's performance.

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Bank of America, Morgan Stanley, and Susquehanna all recommend that investors buy the stock in the hope of decent gains. According to FactSet, Wall Street consensus rates the semiconductor name as a buy with a 20% upside from where it currently trades from where the stock is currently trading.

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According to Morgan Stanley's Moore, "most semis names are at risk, but this is still an intriguing growth story trading at a reasonable price." According to Morgan Stanley, "We still see a long runway of potential data center gains over the long term, including the potential to get traction in data center GPUs."

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Arya wrote that the Bank of America maintains its buy rating on AMD in light of AMD's "share gain potential as well as its attractive valuation compared to INTC.".

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In addition to AMD's lower-end guidance for the fourth quarter, Susquehanna expects a disappointing first quarter.

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“AMD has a short-term thesis that follows: OEMs have piles of unused Intel PC C CPU inventory that they must use in upcoming builds. In his note published on Monday, Christopher Rolland wrote, "Individual CPU inventory issues will persist and sell-in will remain depressed as OEMs sit on piles of unused Intel PC C CPU inventory that must be used in upcoming builds, causing AMD's market share to greatly skew against AMD."

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AMD has also been able to bring about some positives, including the Genoa chips which have helped boost AMD's performance.

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It must be noted that AMD is not immune from enterprise slowdowns, but the performance gap between Genoa and Sapphire Rapids should allow AMD to overcome a softer backdrop," Rolland said.

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There is also evidence that AMD has surged nearly 30% since its last earnings report and has outperformed the broader semiconductor index, which could mean that the bar has been set a little higher for its performance in the future, Rolland said. As a result, he maintained the stock's positive rating.  

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