Why This Analyst Worries That AMD Bulls Ran Its Stock Up Way Too High

Advanced Micro Devices Inc. (NASDAQ: AMD) has been one of the top performing tech stocks in 2016. Its shares were up roughly 150% so far in 2016. After numerous analyst upgrades have been seen in AMD, now Bernstein has warned investors that enough is enough — and maybe even way too much.

Bernstein issued an analyst downgrade on Friday, July 8, to Underperform from a prior unenthusiastic Market Perform rating. Bernstein also has only a $3 price target, implying that AMD investors could be facing a 40% decline if the firm is correct.

What matters here is that Bernstein thinks AMD is likely to disappoint investors in the near term after such a big run. Its processors and chips performed better than expected during the first quarter, but Bernstein thinks that the sales channel might have been filled and its new Zen chip sales into the server market might not take off for another year.

Bernstein is also concerned that AMD, which still loses money, could disappoint when it reports second-quarter earnings results. Those could even be under the consensus expectations of −$0.08 in earnings per share (EPS) and almost $952 million in revenues. That would be narrower than the $0.19 per share loss from a year earlier in the second quarter, but it would only be on a 1% revenue gain from the prior year’s report.

Another warning in the Bernstein note is that the firm feels AMD investors likely have gotten themselves caught up in speculation based on learning (AI) and virtual reality (VR) on top of more and more GPU sales ahead.

If you look at our prior weeks of AMD coverage, analysts had been increasing their expectations for AMD. That being said, they have been doing it for months based on the future expectations. Some noted that the share price appreciation had taken it above other fair value targets. After all, if AMD is at $5.00 and Bernstein is at $3.00, it might make some of the AMD bulls wonder if the stock performance has been ahead of the reality in its turnaround progress.

It is not unusual to see downgrades of this magnitude at all after such large rallies. It is not usual for a stock, even in turnaround mode, to rally 150% or so in a few months.

Positive analyst calls have been made by Wells Fargo, Canaccord Genuity and Jefferies. Those analysts also likely would say that Bernstein’s call was not even worth the effort — AMD shares were up less than 2% at $5.10 on Friday’s close. After all, how great is a downgrade if the stock rallies into it?

AMD’s highest analyst price target was up at $6. Jefferies is excited well beyond upside from just VR with a $5.50 price target, and Canaccord Genuity was excited enough that it sees profitability sooner than expected.

AMD’s consensus analyst price target is now up to $3.98, and its 52-week range is $1.61 to $5.52. AMD will not report earnings until July 21, 2016, so it is going to be almost two weeks before investors get to find out who was right and who was wrong in all the AMD gains.