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Shares of Advanced Micro Devices Inc. have been red-hot since the start of the pandemic, but one analyst worries that momentum could stall due to a possible slowdown in digital-transformation efforts and remote-work initiatives.
Northland Capital Markets analyst Gus Richard warned Monday that unit demand for the semiconductor industry could decline next year, while 2023 could bring “excess capacity.” He downgraded AMD
AMD,
and upgraded Intel Corp.
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giving them both ratings equivalent to a “hold.”
“Demand has been pulled forward by the pandemic and an inventory build is under way with inventory starting to show up on balances sheets throughout the supply chain,” he wrote. “As the global economy recovers…people will transition from buying stuff to doing stuff, and demand for products that consume semiconductors is going to slow, in our view.”
See also: AMD stock nears another record while analysts find only ‘nitpicks’ in earnings
Richard downgraded AMD shares to market perform from outperform Monday, writing about the potential for a demand slowdown, as well as his expectation that “persistently high” inflation could hit multiples. “Liquidity is about to be withdrawn, increasing bond yield, decreasing the value of future earnings, and lowering multiples on growth stocks, in our view,” he wrote in a note titled: “The Thrill is Gone For Now.”
Richard is concerned about what he views as a frothy market and urged investors to pay attention to lessons from the dot-cot crash. Before the bubble burst, venture-capital-backed startups bought “Cisco routers and Sun servers” that later were “sold for pennies on the dollar on eBay depressing semiconductor demand for a couple of years,” he wrote.
Back then, “there was a speculative fever for companies that had a lot of promise and no revenue,” and now, “there are SPACs.”
As for AMD specifically, Richard projects that the company will boost revenue by 65% in 2021 before seeing a slowdown to 21% growth in 2022. He models 104% growth in adjusted earnings for 2021 but expects that rate to slow as well to 30% in 2022.
AMD shares have nearly tripled from their pandemic low, while shares of Intel are off about 9% over the same span. Richard still has some skepticism about Intel’s positioning and company culture, but he upgraded its stock to market perform from underperform Monday in part due to its recent underperformance.
Read: Intel’s capital plan raises margin concerns with analysts
“As a foundry, Intel will likely have the [Department of Defense] and [National Security Agency] as customers and will be able to sell roughly 60,000 high-margin wafers to the U.S. government a year,” he wrote. “We don’t give Intel’s plan a high probability of being successful, but it is not zero either.”
Intel shares were up 0.6% in Monday afternoon trading, while AMD shares were up 2.4%.
