Investing Club: Why this Wall Street pro put a buy on AMD for the first time in a decade

Published Tue, Feb 22 20224:33 PM ESTUpdated Tue, Feb 22 20224:37 PM EST

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

Bernstein's senior semiconductor analyst on Tuesday put the equivalent of a buy rating on Advanced Micro Devices (AMD) for the first time in 10 years — a move we were happy to see. The Club has owned shares of AMD — which designs chips for a range of electronic devices including PCs and cloud servers — for just over a year, and has long believed in the company's transformation under CEO Lisa Su. Stacy Rasgon, a widely respected chip analyst, acknowledged he was a bit late in upgrading AMD to outperform from market perform. But he made a compelling case for why he was finally doing so. 1. Insight from Intel Rasgon said he'd been reconsidering at his rating on AMD for a while, but had to act after comments from Intel management during its analyst day last week. "They basically said that it's open season on data center for the next several years," the analyst said on CNBC's "Halftime Report." "They acknowledge they are going to be losing share through at least 2023, so it was those statements — and a frank acknowledgement from Intel on the competitive situation that their data center business finds itself in — that was what finally tipped me over the edge," Rasgon added. Computing and graphics remains AMD's largest revenue segment. But as we wrote earlier this month , the company has seen impressive growth in the data center processor market. In 2021, its revenue in that category doubled year-over-year. AMD's next-generation EPYC processor codenamed Genoa also is due out this year. We'll get into the Xilinx acquisition in more detail below, but that now-closed deal is another boon for AMD's data center business. 2. Price is right Rasgon maintained his $150 price target on AMD, representing almost 32% upside from Friday's closing price. But the chip designer's stock is looking increasingly attractive on valuation, according to Rasgon, saying it's nearly the cheapest it's been in about five years. After peaking at roughly $164 per share in November, AMD was down about 30% as of Friday's close. AMD's forward multiple tumbled even further, falling by about 50% over the stretch, Rasgon noted. AMD is down 20% year to date, as well. "The stock today is under 30 times next 12 months price-to-forward-earnings. It's 20 times or even less on likely $5 plus in earnings power I think they get in relatively short order, and I don't think that $5 is a peak either," he said. "Their share is increasing. Their mix is still improving," he added. In general, the now-bullish Rasgon said AMD's primary limitation right now is available production capacity at the locations of its manufacturing partners, primarily foundry giant TSMC. "I suspect the more capacity they can get at [Taiwan Semiconductor Manufacturing Company], the more share they will be taking. That is their limiting factor right now," Rasgon said. 3. Confidence in the Xilinx deal AMD's roughly $50 billion deal for Xilinx, which officially closed last week, also played a role in Rasgon's upgrade because the analyst thinks there's underrated upside potential. "Most of the Street has this deal dilutive. [AMD management] suggests that it's actually accretive in the first year, which suggests that they must have a much more positive impression of the Xilinx revenue projection than I think is currently shared on the Street," he told CNBC. Rasgon elaborated on this a little bit more in Bernstein's note to clients. Here is what Rasgon and his colleague Sally Fernandes wrote: [Our] math suggests the company might see an annual revenue run rate that could be hundreds of millions of dollars higher than current expectations. ... Additionally, the combined company is likely sitting on $7B+ in gross cash post-close and is (unlike Intel) generating sizable amounts of cash ... and AMD has (for the first time in their existence) already started to buy back stock in a reasonably material way...; further share count reductions through more material buybacks could conceivably also be a contributor to accretion. And we note the combined company ought to have gross margins in the mid 50's (at least), exceeding Intel as well. Cramer's thoughts During Tuesday's Morning Meeting, Cramer said he thought Rasgon's upgrade was "a great call." "This was the kind of research I've been looking for" on hard-hit technology stocks that now trade well below their prior highs, Cramer said. Early in Tuesday's session, AMD was higher by more than 4%, and Cramer said Club subscribers should be patient and avoid buying shares when they were up that much in a single session. The stock has given up some of its gains in what's been a volatile trading day broadly speaking as Wall Street monitors the latest involving Ukraine and Russia. AMD is now up about 2% to trade around $116 per share. But Cramer still recommends patience, noting investors shouldn't "pay up" for shares no matter how strong they believe in their long-term success. "Discipline trumps conviction here for certain," he added. (Jim Cramer's Charitable Trust is long AMD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Bernstein's senior semiconductor analyst on Tuesday put the equivalent of a buy rating on Advanced Micro Devices (AMD) for the first time in 10 years — a move we were happy to see.

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Kevin Stankiewicz