Advanced Micro Devices Inc. shares rallied for a second day Wednesday after the chip maker named Amazon.com Inc. as a datacenter chip customer along with other product announcements Tuesday, but analysts were divided on how the company’s rollout of new products would jibe with its valuation.
AMD AMD, +4.30% shares surged to an intraday high of $22.22 Wednesday, and were last up 4.1% at $21.52, for a week-to-date gain of 6.4%. In comparison, the PHLX Semiconductor SOX, +0.91% was up 0.9% Wednesday, the S&P 500 index SPX, +1.91% was up 1.7%, and the tech-heavy Nasdaq Composite Index COMP, +2.36% gained 2.2%.
The rally started Tuesday after AMD announced Amazon Web Services’ Elastic Compute Cloud, or EC2, was now using AMD’s Epyc datacenter chips. at its Next Horizon conference in San Francisco. Amazon AMZN, +6.39% said using Epyc chips will lower costs as they are 10% less expensive than current chips they are using.
Don’t miss: AMD celebrates Election Day with a political rally of its own
Back in October, Oracle Corp. ORCL, +2.41% said its cloud service would use Epyc chips, just as Microsoft Corp. MSFT, +3.97% said in December its Azure cloud service would use them.
AMD also introduced its first 7-nanometer Vega-based graphic processing unit, or GPU, the Radeon Instinct MI60 and MI50, and said its second-generation Epyc chip for servers, dubbed “Rome,” is still set for launch sometime in 2019.
In chip parlance, nanometers, or nm, refers to how small a chip maker can make the transistors that go on a computer chip, with the general rule being that smaller transistors are faster and more efficient in using power.
Read: AMD leads chip stocks to rebound from worst month since 2010
Jefferies analyst Mark Lipacis, who has a buy rating and a $30 price target, wrote in a Wednesday note that three events over the next six months will “improve AMD’s competitive position in datacenter and position it to increase its share to 30% from 3% in the $29b datacenter market over the next 3-to-5 years.”
Those events are availability of the Instinct MI60 in the fourth quarter, availability of the 7nm server chips in the second quarter of 2019, and the Amazon deployment, Lipacis said.
Cowen analyst Matthew Ramsay, who has an outperform rating and a $26 price target, said AMD’s conference was a reminder of how Intel Corp.’s INTC, +2.69% delayed rollout of 10-nm chips “could open opportunities for AMD across its business and could re-shift investor focus toward the longer-term opportunity versus near-term GPU headwinds.”
Read: AMD vs. Intel: Balance of chip maker power appears to shift
Stifel analyst Kevin Cassidy, who has a buy rating and a $34 price target, said in a note he believes AMD “can gain market share in both data center CPU and GPU markets as its customers have a clear path to system performance improvements.”
Enthusiasm for AMD’s pipeline, however, was tempered by its share price. Recent volatility has whittled down AMD’s 200% gain on the year, but shares are still among the S&P 500’s best at a 110% gain year-to-date.
KeyBanc analyst Weston Twigg, who has a sector weight rating, said traction on the new products would take time and likely set up a strong 2020, but near-term demand might be risky for AMD’s share price. He said:
We see meaningful opportunity for AMD to expand its CPU share in the datacenter (we anticipate 10-15% share exiting 2019) and to potentially gain datacenter traction with its new 7nm GPU. In our view, this could drive a meaningful acceleration in revenue growth in 2020. However, we see moderate near-term risk as hyperscale demand is slowing and as AMD has relatively high valuation compared to peers, keeping expectations high.
Oppenheimer analyst Rick Schafer, who has a perform rating on AMD, said he’ll stay on the sidelines “as investor share gain expectations for AMD remain elevated and valuation support elusive.”
“Staring down more established competitors with larger R&D budgets, we believe high-end share gains against Intel/Nvidia will prove more challenging than some bulls believe,” Schafer said. keeping us sidelined.
Opinion: Why AMD believes it can challenge Intel in servers
AMD is attempting to battle datacenter-chip leader Intel as well as Nvidia Corp. NVDA, +0.76% which has built a sizable business providing graphics-processing units for servers.
Morgan Stanley analyst Joseph Moore, who has an underweight rating and a $17 price target, said barriers to entry in the datacenter are high and that the “payoff” of 7nm technology “may be overstated.”
We think generally that the bulls underestimate the barriers to entry in the data center, both in terms of how long it will take and how big it can become, and references to 2006 AMD peak share miss how much different the benchmarking battle was in 2006 on many fronts.
Of the 34 analysts who cover AMD, 14 have overweight or buy ratings, 15 have hold ratings, and five have sell ratings, with an average target price of $23.60.
Get the top tech stories of the day delivered to your inbox. Subscribe to MarketWatch's free Tech Daily newsletter. Sign up here.
