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Concerns about valuation and competition prompted Goldman Sachs to go bearish on Advanced Micro Devices (ticker: AMD) Thursday, sending shares skidding 9.4% to a recent $12.84.

Was that the right call? Barron’s doesn’t think so.

Analyst Toshiya Hari and his team initiated coverage on AMD with a Sell rating and $11 price target. He writes that the “current risk-return is unfavorable with the stock trading at 15 times earnings per share on our ‘very bullish’ 2018 scenario, implying that the potential improvement in fundamentals is already priced into the shares. Furthermore, we believe the probability of AMD achieving our ‘very bullish’ scenario is low given competitive threats from Intel (INTC)…and Nvidia (NVDA).”

Hari’s thesis contains many good points and shows how the stock could suffer if AMD’s new products don’t catch on. But Barron’s has long argued that AMD could see more upside even after it was the best performing stock in the Russell 2000 in 2016. In February, when shares fetched $12.24, we argued that shares of AMD could double this year.

After all the stock’s big run, it’s easy to see why Hari calls the shares richly valued. However, looking at his estimates in a “very bullish” scenario, which calls for AMD gaining a good deal of market share, he expects the stock to trade at just 1.6 times enterprise value to revenue, and 15 times earnings—multiples that don’t look unreasonable at all.

If AMD does achieve the market share Hari describes (and Barron’s believes it can), the market would likely award it with higher valuations, meaning the shares don’t look overpriced today.

In fact, the base case that Hari describes assumes AMD will make very little progress at all: He expects AMD will claim just 11.6% market share in desktops, 9.4% in notebooks, and 1.1% of servers.

Those numbers look too low, given the positive reviews for its new Ryzen 7 CPU product and more products expected later this year.

Hari is right to say that competition is fierce, and AMD has lower research and development spending than Intel and Nvidia. Yet as Ryzen 7 shows, AMD can do more with less without losing its competitive edge.

An upbeat outlook for the PC market bolsters BlueFin Research’s bullish thesis on AMD and Intel, while both Jefferies and Susquehanna see upside for AMD’s second quarter.

AMD also delivered better-than-expected first-quarter earnings and guidance in January.

Ultimately, Goldman Sachs’ dim view of AMD looks too bearish, and the stock’s steep decline is a buying opportunity.



-- Additional reporting by Tiernan Ray

Comments? E-mail us at editors@barrons.com

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