When Advanced Micro Devices (NASDAQ:AMD) traded as high as $59.27 a few weeks ago, hindsight 20/20 would suggest that it was too good to be true. Even after the stock corrected to the $42.32 - $45.50 range, valuations are still unfavorable. Although AMD upgrades from reputable analysts (average price target of $52.67), investors cannot ignore fundamental headwinds.
Microsoft updated its third-quarter fiscal year 2020 guidance on Feb. 26. It said that COVID-19 containment in China will hurt Windows demand. It said that it does not expect to meet its More Personal Computing segment guidance. Windows OEM and Surface sales will weaken in the upcoming quarter. If system PC software sales are falling, so too will PC systems. That will hurt the chip suppliers, including AMD, Intel (NASDAQ:INTC), and Nvidia (NASDAQ:NVDA).
In the weeks ahead, expect big semiconductor names like Broadcom (NASDAQ:AVGO) and Micron Technology (NASDAQ:MU) issuing warnings or updating the outlook. China's production and activity are resuming, albeit very slowly. So, chances are high that economic activity in the current quarter will disappoint the market.
AMD fell 23% from 52-week highs but is still trading at 29 times forward earnings. At a PEG of 4.4 times, the stock still reflects a rosy outlook.
Tread carefully before buying AMD stock.
