While the new gold rush in generative A.I. might have enlarged the overall pie for semiconductor businesses, a slump in PC sales globally and geopolitics present more pressing near-term challenges for Advanced Micro Devices (AMD). Read on…

Advanced Micro Devices, Inc. (AMD) has slumped 5% over the past month and 21.2% over the past year to close the last trading session at $81.16. While it is still trading above its 50-day and 200-day moving averages of $74.74 and $78.35, respectively, NVDA’s weak fundamentals and near-term uncertainties carry with it risks of further downside, which investors would be wise to avoid, despite the ongoing hype regarding AI.

The global semiconductor company’s two segments are computing and Graphics; and Enterprise, Embedded, and Semi-Custom. It serves original equipment manufacturers (OEMs), public cloud service providers, original design manufacturers, system integrators, independent distributors, online retailers, and add-in-board manufacturers.

Let’s closely examine its fundamentals:

Ebbing Financial Performance

For the fourth quarter of the fiscal year, which ended December 31, 2022, AMD’s revenue increased 16% year-over-year to $5.60 billion, while its gross profit increased 17.8% year-over-year to $2.86 billion. Although this was primarily driven by growth across the Embedded and Data Center segments, it was partially offset by lower Client and Gaming segment revenue.

During the same period, AMD’s operating income decreased 5% year-over-year to $1.26 billion. As a result, the company’s net income and EPS decreased 0.8% and 25% year-over-year to $1.11 billion and $0.69, respectively.

AMD’s total liabilities stood at $12.83 billion as of December 31, 2022, compared to $4.92 billion as of December 25, 2021.

Underwhelming Near-Term Prospects

For the first quarter of 2023, AMD expects revenue to be approximately $5.3 billion, plus or minus $300 million, a decrease of approximately 10% year-over-year, due to a decline in Client and Gaming segments, which would be only partially offset by growth in Embedded and Data Center segment.

Consequently, AMD’s EPS is expected to decline 50.4% and 12.9% year-over-year to $0.56 and $3.05 for the first quarter and the entirety of fiscal 2023.

Stretched Valuation

In terms of its forward P/E, AMD is trading at 26.62x, 30.9% higher than the industry average of 20.34x.

Similarly, AMD’s forward EV/Sales and EV/EBITDA multiples of 5.39 and 16.35 are higher than the respective industry averages of 2.79 and 13.04.

AMD’s forward Price/Sales ratio of 5.51 also compares unfavorably to the industry average of 2.75.

POWR Ratings Reflect Mixed Outlook

AMD’s bleak outlook is reflected in its POWR Ratings. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AMD has a grade D for Growth consistent with the forecasts of a slump in PC Sales as consumer demand softens.

In addition, AMD’s high beta of 1.98 and equally high spread between its 52-week high and low prices of $125.67 and $54.57, respectively.

Unsurprisingly, AMD ranks #83 of 91 stocks in the B-rated Semiconductor & Wireless Chip industry.

Click here for additional ratings for Value, Sentiment, Momentum, and Quality for AMD.

Bottom Line

Fundamentals apart, On October 7, 2022, the U.S. imposed export restrictions on advanced semiconductors and chip-manufacturing equipment to prevent American technology from advancing China’s military power. This followed August 31 instructions to AMD from U.S. officials to stop exporting its top artificial intelligence chip to China.

With Xi Jinping taking a rare direct aim at the U.S. in his speech, tensions are likely to remain elevated in the foreseeable future.

Given its relatively high valuation and the near-term uncertainties, it could be wise for investors to avoid this stock for now.

Stocks to consider as alternatives to Advanced Micro Devices, Inc. (AMD)

Given its uncertain short-term prospects and the recent surge in stock price, the likelihood of AMDs stock outperforming in the weeks and months ahead appears low. However, there are many industry peers with much more impressive POWR Ratings. So, consider these 3 A-rated (Strong Buy) or B-rated (Buy) stocks from the Semiconductor & Wireless Chip industry instead:

Taiwan Semiconductor Manufacturing Company Limited (TSM)

Broadcom Inc. (AVGO)

STMicroelectronics (STM)

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AMD shares were trading at $82.25 per share on Tuesday afternoon, up $1.09 (+1.34%). Year-to-date, AMD has gained 26.99%, versus a 4.11% rise in the benchmark S&P 500 index during the same period.

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About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.

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