Why Advanced Micro Devices Stock Just Dropped
Key Points
AMD stock sold off today on worries about the progress of its MI450 AI chip.
Wells Fargo analyst Aaron Rakers says those worries are overblown.
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Advanced Micro Devices (NASDAQ: AMD) stock tumbled 5% through 2:35 p.m. ET Friday -- but maybe it should not have?
In a note out this morning, Wells Fargo analyst Aaron Rakers both identified the catalyst behind today's AMD stock decline and also explained why he thinks today's sell-off is a mistake.
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Risk and opportunity: the MI450 AI chip
Rakers blames a report from independent research and analysis company SemiAnalysis, which covers semiconductors in general and artificial intelligence in particular, for AMD's sudden decline.
As you're probably aware, AMD is trying to break into the AI market that Nvidia (NASDAQ: NVDA) currently dominates. AMD says its "MI350 Series GPUs set a new standard for Generative AI and high performance computing (HPC) in data centers," and its upcoming MI450 chip will be even better. But according to SemiAnalysis, AMD has hit a hiccup in developing the MI450, and that chip will be delayed.
Rakers begs to differ.
AMD has good "traction" on MI450, says Wells's analyst, and should begin ramping production of the chip in the second half of this year. Worries to the contrary are overblown, and Wells, which has a $345 price target and an overweight rating on AMD, "would be a buyer on stock weakness," reports TheFly.com.
Is AMD stock a buy?
Is Raker right to be optimistic? I admit I have no special insight into AMD's progress on MI450. But let's assume he's right about MI450 being on track.
Most analysts see AMD growing earnings 44% annually over the next five years, so a 40-50x price-to-free cash flow ratio or price-to-earnings ratio should suffice to make this stock a buy. Problem is, AMD currently costs 76 times FCF and 124 times earnings.
At these high prices, I'm afraid AMD stock is still a sell.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
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