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Advanced Micro Devices downgraded by Baird; price target jacked up to $28 from $20

Expectations about the market share gains the chipmaker is likely to see due to its rival Intel’s shortage in central processing units are too high, says Baird's Tristan Gerra

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AMD faces fierce competition from rival Intel, which has been the market share leader for microprocessors for many years

A Baird analyst has downgraded Advanced Micro Devices Inc (NASDAQ:AMD) to Neutral as weakness for its graphic cards is set to last for another two quarters and he sees expectations for the chipmaker and its valuation as too high.

AMD’s fundamentals are improving, argues Baird’s Tristan Gerra in a note to investors, but expectations about the market share gains the chipmaker is likely to see due to its rival Intel’s (NASDAQ:INTC) shortage in central processing units are too high.

“We think most good news are already priced in,” Gerra wrote. “We believe expectations and valuation are high, prompting our downgrade.”

It emerged today that Intel is planning to address its problematic tight supply by investing as much as $1 billion this year in expanding its 14nm manufacturing sites, according to a report in Digitimes, the Taiwanese trade publication. But sources told DigiTimes that Intel's chip shortage probems are not set to be completely resolved by the end of 2018.

Read: Advanced Micro Devices sold fewer graphic cards to crypto miners but analysts aren’t worried just yet

The outlook for the rollout of AMD’s new EPYC chips looks impressive, but remains limited, according to Gerra, and its rival Intel will react with new architectures.

Not entirely bearish on the stock, however, Gerra raised his price target on AMD to $28 from $20 on the back of robust sales of 7nm chips, near-term share gains in AMD’s PC business in the face of Intel’s CPU shortage and rosy projections for the chipmaker’s newly-refreshed Athlon central processing units (CPUs).

Weakness in graphic cards is set to continue for another two quarters, driven by channel inventory deleveraging, while EPYC chips will represent as much as 8% of AMD’s total revenue for the full year, according to Gerra’s estimates.

Another risk AMD faces is that as a fabless semiconductor company, it depends on third-party manufacturers for manufacturing, assembly and testing processes.

It also faces fierce competition from its rival Intel, which has been the market share leader for microprocessors for many years and can use its financial resources and diversified revenue to apply pricing pressure on certain products, which could impede AMD’s market share gains.

In another indicator of weakness in the chip space, Gerra reported on Friday that the chip maker Micron's contract pricing for both its DRAM and NAND chips slipped in September. Micron's DDR4 4Gb and 8Gb contract pricing declined 3% month-on-month for September while its TLC 128Gb NAND contract pricing fell 9% month-on-month over the same period, according to a note from Gerra.

In Monday’s pre-market session, AMD shares were flat at $30.91.

Quick facts: Advanced Micro Devices, Inc.

Price: 41.15 USD

NASDAQ:AMD
Market: NASDAQ
Market Cap: $48.02 billion
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