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The Ratings Game: AMD stock could be held in check due to PC pressures, Bernstein warns in downgrade

Shares of Advanced Micro Devices Inc. shot up more than 9% Monday to post their best performance since November in the wake of a Barclays upgrade, but now another analyst is suggesting that investors take a pause.

See more: AMD can keep eating Intel’s lunch, Barclays says as stock surges

Bernstein’s Stacy Rasgon downgraded AMD shares
AMD,
+9.22%

to market perform from outperform late Monday, warning of challenges in the market for personal computers. These PC issues could pressure the stock, even though AMD still enjoys opportunities to capitalize on Intel’s
INTC,
+3.59%

data-center weakness, which was a center point of Rasgon’s AMD upgrade last February.

AMD shares are off more than 2% in premarket trading Tuesday.

The environment for PCs “has grown considerably worse” since the time of Rasgon’s February upgrade, he wrote, meaning that his “belief that AMD would prove relatively more immune to channel degradation proved unfortunately incorrect.”

Now, Rasgon is worried about Intel’s moves in the PC market. He wrote of concerns about “the market outlook” broadly, along with “Intel’s semidestructive behavior as of late as they use both price and capacity as a strategic weapon, continuing to overship even amid broader breakdowns in the industry.” His take is that “Intel has decided that if the channel is going to hold parts, it might as well be their parts.”

Accordingly, Rasgon has witnessed “AMD’s new client parts available at heavy discounts at retail less than 2 months after launch (much deeper, and much more rapidly than the prior generation).” This trend could pose problems for gross margins, he noted, as could rising costs.

Read: This is the ‘biggest disconnect’ in the chip sector, according to Barclays

“AMD already began to suffer gross margin degradation in Q3, with results suggesting client and gaming must have been under significant pressure,” Rasgon said. The “Q4 outlook suggests they see headwinds continuing, though we wonder if things might have gotten worse.”

Rasgon lowered his price target on the stock to $80 from $95, writing of “incremental risk to estimates above and beyond potential market headwinds” and his expectation that multiple expansion could be limited for AMD before Wall Street “can get a sense of the bottom.” His downgrade comes even as he acknowledges that AMD’s “server story is working.”

Shares of AMD have risen 30% over the past three months, though they’ve declined 34% over a 12-month span.

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