AMD Stock Bounces After Major Bank Admits It Made The “Wrong Call”

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

Shares of Advanced Micro Devices have been on a tear recently leading the S&P 500 year-to-date in gains at up nearly 60 percent. Recently, AMD made a solid showing of its Computex keynote presentation where it showed off upcoming products that wowed investors and just days later announced a new graphics-related partnership with Samsung.

Morgan Stanley reverses call on AMD, sees "positive near-term catalysts"

AMD 7nm inventory is getting ready to hit the market in 2H 2019.

One of the largest doubters of AMD has been Morgan Stanley (NYSE:MS) , who has maintained an underweight rating and low ball price target on AMD for quite some time now. Today, a Morgan Stanley equity analyst finally admitted the firm got it wrong on the chip maker with a note to investors that read (in part):

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Being cautious on the stock has obviously been the wrong call, even though we were right on some aspects. While our earnings concerns over the last 12 months have played out ... the table is set well for 2020 and there are positive near-term catalysts.

-Morgan Stanley analyst Joseph Moore

The bank raised its price target from $17 to $28 and now rates AMD as "equal weight". Anytime a major firm like Morgan Stanley raises a price target and rating so drastically investors take notice and unsurprisingly AMD soared today by almost 8 percent to $31.81. The company is now trading about two dollars shy of its 52-week high of $34.14, which was seen last September before the tech market sell-off began sometime in October.

The analyst made sure to caution its clients that there could be too much hype despite all the recent announcements. Moore advises that "too much short-term optimism" may exist around the stock and that earnings concerns are still valid.

Moore raises a valid point. While AMD does have a solid product pipeline planned out for the foreseeable future (at least in the world of CPUs, the jury is still out on how Radeon will stack up in 2020 and beyond), it is trading at a very high price to earnings ratio - meaning its share price is inflated in relation to its real-world earnings its managed to post thus far. AMD is expected to earn up to a dollar per share in earnings by 2020, which would put its expected PE ratio at around 30:1. For comparison, Intel's (NASDAQ:INTC) PE hovers around 6:1. This is somewhat to be expected since AMD is all about growth potential while Intel has saturated its market.

AMD remains minimally profitable as it currently stands and now its time for the company to show some serious market share growth in some key areas such as the data center and the laptop segment, both of which it has struggled to penetrate with first generation Ryzen and EPYC parts. That is the general story of Morgan Stanley's analysts: AMD has great things happening very soon but it needs to continue to execute and book the actual revenue to prove that its current valuations are reasonable.

Morgan Stanley does go on to say that cloud gaming is shaping up to be an excellent growth driver for AMD and the firm even mentions the Palo Alto, CA-based semiconductor company could be announcing a new gaming partnership soon with Microsoft (NASDAQ:MSFT). This could be a big feather in AMD's cap as some video game industry pundits have claimed that PlayStation 5 and the next-gen Xbox will be the last of the locally accelerated gaming stations. Should AMD win Microsoft's cloud business it would be a natural choice once Sony is ready to take the plunge.

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