What happened
Shares of Advanced Micro Devices (AMD -5.78%) fell again on Wednesday, down 5.1% as of 12:48 p.m. ET.
Even though the stock fell hard yesterday on the back of a bad consumer sentiment number from the Conference Board, today followed through with another drop, as a prominent semiconductor analyst slashed his price targets across the sector.
So what
On Wednesday, Bank of America analyst Vivek Arya lowered his price target on AMD, slashing it from $160 to $110, although he did keep his buy rating on shares. Arya actually appears bullish on AMD relative to the rest of the sector, but the AMD price target cut was part of a broader downgrade of the whole sector, including Nvidia (NVDA -3.87%), which was also kept at buy. These two fared relatively well, however; Arya actually downgraded his ratings for several other semi names to either neutral or underperform, so one could say AMD actually fared better in his analysis than its sector peers.
The reason for the sectorwide downgrade was pure macroeconomics, as Arya anticipates a slowdown in GDP or recession will cause a semiconductor downcycle. His note said: "All-in we lower our CY22E semi sales forecast to $608bn (9.5% YoY vs. 13% prior) and CY23E to $604bn (-1% YoY vs 7% prior). This includes -4% YoY decline in non-memory chips, similar to past periods of 2-3% global GDP growth, likely the case next year."
Meanwhile, the first-quarter U.S. GDP numbers were actually revised down slightly today on their third revision, which showed a 1.6% decline, versus the initial 1.5% estimate. The slightly weaker reading comes even as central bankers are aggressively hiking interest rates to tame inflation, which some investors predict will lead to a recession.
Now what
Certainly, a recession would probably not be good for any sector of the economy, and semiconductors have tended to be even more economically sensitive than others in the past. However, semiconductor investors may take solace in the fact that even Arya doesn't think a semi downturn will be as bad as prior downcycles. He continued: "Since 1995, the average semi downturn has produced sales declines of about 9%, including 15% in memory but only 5%-7% in non-memory, core semis. Today, while a macroeconomic deceleration can cause unit weakness, we do see unique pricing leverage providing some support for semis relative to historical levels."
AMD is well positioned today, as its chips have vaulted ahead of rival Intel's (INTC -1.60%) over the past couple years. Since Intel had been the dominant processor manufacturer for years, AMD has the opportunity to take market share, perhaps offsetting some sectorwide weakness, should it happen. Of note, last week other analysts at J.P. Morgan predicted AMD could double its server market share next year, potentially reaching 30%-40% of server chip sales, versus 20% today.
AMD's business has boomed in recent years, but its stock has been a tad expensive. However, with shares now back near 30 times earnings and what looks to be a solid growth year in 2022, AMD's stock is looking enticing for the first time in a while -- although much of the semiconductor sector is as well.
