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Is This Wall Street Firm Underestimating AMD?

The yearlong run of Advanced Micro Devices (NASDAQ: AMD) stock came to a sudden halt last week after Goldman Sachs initiated coverage on the semiconductor specialist with a sell rating and an $11 price target, compared to the $13 that it is trading for at the time of writing. Analyst Toshia Hari believes that the chipmaker has gotten ahead of itself after its terrific 390%-plus rally over the past year, as rivals Intel (NASDAQ: INTC) and NVIDIA (NASDAQ: NVDA) could knock the wind out of AMD's sails through discounted products.

Hari's research note points out that AMD's market share won't improve dramatically with its new products as NVIDIA and Intel could cut prices of their chips to keep the former under pressure. The analyst wrote, "While we expect Intel and NVIDIA to remain disciplined on pricing, if necessary, both companies have the capacity to compete on price given significantly higher gross margins."

Evidently, Hari's thesis is based on AMD's new products failing to do as well as expected because of competition from rivals. But this ignores the recent popularity of AMD's GPUs that has led to a turnaround in the companys market share in recent quarters, and that its latest products are reportedly delivering more performance for less money -- which could give the chipmaker an edge over NVIDIA and Intel.

AMD's GPU market share is fast improving

AMD has broken into NVIDIA's stronghold in the discrete graphics processing unit (GPU) market over the past year thanks to its focus on providing powerful graphics cards to gamers on a budget.

GPU Supplier

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

AMD

21.6%

22.8%

29.9%

29.1%

29.5%

NVIDIA

78.3%

77.2%

70%

70.9%

70.5%

Data source: Jon Peddie Research.

It is now going after NVIDIA in high-end graphics with its latest Vega GPU, and could possibly match NVIDIA's latest GTX 1080 Ti graphics card, if claims by an AMD executive (via The Inquirer) are to be believed. Though AMD hasn't released the tech specs and the pricing of the Vega GPU yet, it is expected to be in line with NVIDIA's $699 price for the 1080 Ti, with a price tag between $600 and $700.

According to leaked information the Vega GPU is going to pack a lot of computing power, and is said to be two times faster than the NVIDIA Pascal X in deep-learning scenarios. If AMD undercuts NVIDIA's latest offering on pricing and delivers an identical performance, then it stands to gain more market share.

AMD is going after Intel in server chips

Intel has a vise-like grip over the server chip market, with a share of 99.3% in the third quarter of 2016. However, AMD is now going to try and hurt Intel's near-monopoly in this market with its Naples architecture.

The Naples CPU for servers was previewed by AMD in early March and is claimed to carry 45% more cores and 122% more bandwidth memory than Intel's fastest Xeon server chip. AMD believes that the stronger specs allow Naples to perform at least twice as fast as the Intel offering in various seismic analysis scenarios, though independent benchmark tests will illustrate the real potential of these chips.

Cisco forecasts that data centers will witness a 262% spike in traffic in 2020 from 2015 levels, processing 92% of the workload in the cloud. AMD's movement into the server-chip market is timely, as data center servers are going to need a lot of processing power.

Image source: AMD. 

Similarly, AMD is trying to challenge Intel's stronghold in the desktop CPU market with its Ryzen CPUs. As it turns out, AMD's flagship Ryzen 1800X CPU costs half as much as a comparable Intel Broadwell processor, which could make it the processor of choice for workstation users. Intel has recently lowered the price of its processors, indicating that it is scared of AMD's potential gains in the desktop CPU market.

Goldman doesn't have much company

Goldman Sachs' bearish outlook on AMD is not in line with the Wall Street consensus. Jefferies and Susquehanna have both raised their price targets on the semiconductor specialist in the past month, citing possible market share gains -- thanks to the growing adoption of its Ryzen chips -- that could drive incremental sales of $1.1 billion to $4.6 billion.

Three analysts have raised their earnings projections for the current year and none have revised down. Investors, therefore, shouldn't get into panic-selling mode after the Goldman Sachs downgrade, as market share gains could boost AMD going forward.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool recommends Cisco Systems and Intel. The Motley Fool has a disclosure policy.