The Ratings Game: AMD’s strong rally could cool amid potential ‘fatigue’ in PC market, analyst says in downgrade

Following a strong rally in recent years, Advanced Micro Devices Inc. shares could to face a tougher stretch ahead amid signs of fundamental “fatigue.”

Piper Sandler analyst Harsh Kumar downgraded AMD’s stock AMD, -0.59% to neutral form overweight Thursday, writing that a potential slowdown for the PC market could weigh on momentum in the year ahead. Shares of AMD are off 0.9% Thursday.

While Kumar doesn’t anticipate “a breakdown in fundamentals in the near-term” or earnings misses during the next two quarters, he does predict that some industry dynamics could become less favorable.

Researcher Gartner indicated a 5% year-over-year decline in worldwide PC shipments during the fourth quarter, and though 2021 was overall a strong year for the category, Kumar thinks growth will be down in 2022 as the consumer PC market could show “signs of fatigue.”

“[U]ltimately we do see a combination of growth and a slowing PC environment burdening the stock,” he said in his note to clients. “In our eyes, this represents a high-multiple setup coupled with a slowdown in growth.”

AMD’s stock has lost about 12% so far this year, after soaring 57% in 2021 and rocketing 100% in 2020. The stock has increased 13-fold over the past four calendar years.

See also: AMD shows off $200 graphics card and new chips in CES presentation

Kumar also has concerns about what AMD’s pending deal for Xilinx Inc. XLNX, +1.53% could mean for the company’s financials and perception. He projects that AMD could grow organic revenue by about 24% in 2022 after seeing an estimated 65% bump in 2021, but when factoring in the slower growth estimates that analysts have for Xilinx, Kumar forecasts a full-year growth rate for the combined AMD-Xilinx of 21% to 22%.

Kumar sees some financial positives to the deal, including that it could boost AMD’s overall operating margins. But he also thinks the combination could “only be a few cents accretive in the first full year, which is below initial expectations at the time of the deal announcement.”

Accordingly, the merger could “lead to more fatigue in the near term than benefit given the lower growth profile and limited initial cost cuts,” he wrote.

AMD had expected the Xilinx deal to close by the end of 2021, but it has yet to receive all of the required regulatory approvals and now anticipates that the transaction will close during the first quarter of 2022.

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Kumar also cut his rating on shares of NXP Semiconductors NV NXPI, +0.09% VNX, -1.43% to neutral from overweight Thursday due to his fears about the automotive sector.

“We believe the pace of orders and strong pricing may come into question as supply normalizes in the second half of calendar 2022,” he wrote.

About half of NXP’s revenue is linked to the auto market, he continued, making the stock “most at risk” from this trend among the names he covers.

Shares of NXP are off 0.5% in Thursday trading. They’ve increased about 6.3% over the past three months and AMD shares have risen 9.4%, as the S&P 500 SPX, +1.21% has gained 1.3%.

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