Shares of Advanced Micro Devices (NASDAQ: AMD) have sold off following the company's first-quarter earnings announcement on April 30. The company's revenue was consistent with expectations, but investors were looking for a stronger outlook for the data center business.
KeyBanc analyst John Vinh lowered his price target on the shares from $270 to $230. The firm maintained an overweight (buy) rating on the stock, and it sees AMD as still on track to capitalize on the growing demand for graphics processing units (GPUs) due to artificial intelligence (AI).
Why AMD stock is down
In January, management raised its guidance for the data center segment to bring in $3.5 billion in full-year revenue, up from the previous estimate of $2 billion. The latest outlook now calls for full-year data center revenue to exceed $4 billion.
AMD may have raised its outlook, but investors were expecting an even bigger increase to guidance. That said, demand is outstripping supply, and KeyBanc believes the latest number is still on the conservative side, making the recent dip a buying opportunity.
Is the stock headed to $230?
Investors do have high hopes for AMD to accelerate its growth in the near future -- the stock trades at a premium with a forward price-to-earnings ratio of 42 (as of this writing). However, even the first quarter's 80% year-over-year data center growth wasn't enough to offset the nearly 50% declines in embedded chips and gaming. The weakness in those segments dragged total revenue growth down to just 2% for the quarter with adjusted earnings up 3%.
It's difficult to predict where the stock will go in the near term, but it's clear AMD will need to show stronger growth across the business before the stock can climb the approximately 60% needed to hit the analyst's price target. On that note, AMD expects a recovery in the embedded chip business in the second half of 2024, which could be enough of a catalyst to support the share price for now.
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John Ballard has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices. The Motley Fool has a disclosure policy.
