What happened
Shares of Advanced Micro Devices (AMD -3.57%) were falling today, as much as 5%, before settling into a 4.6% loss as of 12:30 p.m. ET.
One can chalk up today's decline to two things: First, the 10-Year Treasury bond continued its ascent, reaching 2.77% today -- that's up more than an entire percentage point since the beginning of the year. Rapidly rising long-term rates tend to hurt high-multiple growth stocks, and at 38 times earnings, AMD is certainly that.
Second, AMD rival Nvidia (NVDA -4.61%) was downgraded by analysts at Baird today. Although the downgrade wasn't about AMD, the factors driving the Nvidia downgrade affect AMD as well.
So what
Baird analyst Tristan Gerra took a hatchet to Nvidia today, lowering his rating from overweight to neutral and slashing his price target on the stock from $360 to $225. That's a pretty big downgrade, and unfortunately for AMD shareholders, it's not due to an Nvidia-specific problem.
Gerra believes these companies' customers are canceling orders for graphics processing units (GPUs), amid falling prices for these chips in both Europe and China. The declines seem to be primarily centered around consumer devices, he notes.
Gerra also sees the recent embargo on chip sales to Russia being more impactful than some believe. Although Russia is a very small percentage of overall global chip sales, Gerra thinks there is an outsize percentage of gamers and crypto miners there -- two big applications for GPUs. And with the Russia-Ukraine conflict potentially leading to a European recession and China recently implementing COVID-19-related lockdowns, it's not a great picture for consumers to go buy deluxe PCs with high-end graphics, especially since many loaded up on new PCs earlier during the pandemic.
This downgrade didn't come out of the blue, either. Last week, analysts at Truist Financial also downgraded Nvidia, and included AMD and Intel in their downgrade as well for similar reasons: a sudden sharp decline in consumer demand for electronic devices.
Image source: Getty Images.
Now what
Amid its decline today, AMD shares are down nearly 30% on the year and 37% from their all-time highs.
Has the hate gone too far? Analysts seem to think so, as AMD shares now sit below every sell-side analyst's price target. Yet as is the case with basically all semiconductor stocks, AMD will be at the mercy of macroeconomic events, as well as a potential softening cycle as the world transitions to the next iteration of the COVID-19 pandemic.
One silver lining is that these downgrades don't mention data center growth, which occupies AMD's enterprise, embedded, and semi-custom segment. Last quarter, the enterprise segment grew 75% to $2.2 billion, while the consumer-centric segment grew 32% to $2.3 billion. With AMD's Epyc data center chips growing fast and AMD's enterprise segment about to surpass the computing and graphics segment in size, data center growth is becoming more important to the company relative to the struggling consumer segment.
So far in this downturn, no analyst that I've seen is seeing a slowdown in enterprise or cloud spending. That being said, if consumer demand weakens further, weakness could creep into enterprise spending as well, so it's something for investors to keep an eye on.
After its decline, AMD looks reasonably valued here; however in the near term, the picture is highly uncertain, given the mix of geopolitical, virus-related, and inflationary factors that are largely out of the company's control.
