On Thursday, Morgan Stanley released a note to its clients in which it admitted its previously cautious outlook on Advanced Micro Devices (NASDAQ:AMD) stock had been the “wrong call.” The firm upgraded AMD stock to “equal weight.”
The impact of this upgrade on AMD stock price was immediate. AMD stock began to surge and didn’t stop until it had hit $31.82 for a 7.86% gain on the day. The halo effect is apparently not over yet, as AMD stock price tacked on nearly 2% on Friday.
Morgan Stanley Changes Course, AMD Stock Posts Big Gain
Morgan Stanley has been bearish on Advanced Micro Devices stock for several years. Its analysts weren’t convinced that the company’s Ryzen processors could take and sustain meaningful market share from Intel (NASDAQ:INTC).
Even more concerning was the big boost AMD’s graphics card sales were getting from cryptocurrency miners, a huge source of revenue that analysts felt could drop dramatically. Also factored in were declining sales of video-game consoles, which has also negatively affected AMD’s revenue.
When Morgan Stanley downgraded Advanced Micro Devices stock to “underweight” in October 2017, the market’s reaction was swift and harsh, resulting in AMD stock price tanking. Advanced Micro Devices stock lost 25% of its value within a week of the call.
Last week, Morgan Stanley’s analysts reversed course. Noting that “underweight” had been the “wrong call” on AMD stock, the firm , in a note to investors, raised AMD stock to “equal weight,” hiking its target price for Advanced Micro Devices stock from $17 to $28. The firm wrote:
“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.”
Many Things Are Going Right for AMD
Advanced Micro Devices has been hit by some negative trends, but they have impacted its competitors just as badly. Nvidia (NASDAQ:NVDA) is also feeling the sting of the crypto mining collapse. And pretty much all American tech companies are feeling the effects of the escalating trade war with China.
But AMD stock has had a lot of positive catalysts, and its series of wins has been impactful enough to finally convince Morgan Stanley that it had made an error.
Among the positives for Advanced Micro Devices stock are the continued success of its Ryzen computer processors. The newly announced third-generation Ryzen lineup includes a flagship chip that outperforms Intel’s best and costs 50% less.
The strong popularity of AMD’s Radeon GPUs and the coming launch of its new 7nm Navi graphics cards have Nvidia scrambling. And in March, AMD stock got a 12% boost when it was announced that the company would provide the custom GPUs that will power Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Stadia cloud gaming service.
Room for Growth?
AMD stock has weathered the worst of the crypto mining storm. Meanwhile, its product road map in terms of CPUs and GPUs is set well into next year, and it has momentum. Additionally, AMD stock price has plenty of runway before hitting its all-time high of $46+, which it reached in 2000.
However, at this point, the company is just barely profitable — it delivered EPS of 1 cent in Q1 — and it has a very high P/E ratio of over 129. And its future is a little murky. Will the next generation of game consoles be the last before all video games become cloud-based? Will AMD’s Ryzen chips continue to gain ground, or will Intel soon start delivering big performance gains?
Morgan Stanley still has concerns about AMD, which are reflected in its $28 target price for AMD stock. Given the spike in AMD stock price, many investors clearly feel otherwise, seeing a rosy future for the American semiconductor company.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.