1 Wall Street Firm Thinks Advanced Micro Devices Stock Is Going to $185 Instead of $200 — But Is It Still a Buy?

Analysts at Susquehanna are sounding a note of caution ahead of Advanced Micro Devices(AMD 1.78%) first-quarter earnings report due on Tuesday after the market close.

The firm maintained a positive rating on the shares but lowered its price target from $200 to $185. The analysts expect the company to issue weaker guidance in the upcoming report that could limit the stock’s near-term upside. Here’s why.

A lot is riding on AMD’s data center GPUs

Investors are anticipating great news from the company’s data center business, where revenue surged 43% in the fourth quarter of 2023 over the previous quarter. AMD has previously guided for its data center graphics processing units (GPUs), which are in high demand for artificial intelligence (AI), to rake in around $3.5 billion in revenue this year.

However, the rest of the business is expected to remain soft. A weak year for PC shipments caused AMD’s client segment, including sales of Ryzen desktop processors, to post a 25% decline in revenue last year. The gaming and embedded segments also saw revenues fall, but management doesn’t expect the embedded business to recover until the second half of 2024.

Is the stock a buy ahead of earnings?

AMD will need to offer a strong outlook for 2024 to justify the stock’s valuation. AMD shares trade at a forward price-to-earnings ratio of 44, which is more expensive than Nvidia‘s 35 forward P/E. If the stock hits the analysts’ price target, it will likely be due to surging demand for its MI300 data center GPUs and the expectation for a recovery in AMD’s client segment later this year.

Nonetheless, AMD’s share price should eventually climb back to the previous high of $227. The company has a lucrative opportunity to supply chips for AI PCs and data centers for many years. From a long-term perspective, the stock would be a compelling buy on any weakness following tomorrow’s earnings report.

John Ballard has positions in Advanced Micro Devices and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.

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