Due to strong server performance and reasonable valuation, Morgan Stanley's analyst Joseph Moore is resuming coverage of AMD stock at Overweight rating, despite headwinds from end-market. 

In his note to Morgan Stanley clients, Moore acknowledged that demand softness across all the end markets due to tough comparisons to pandemic levels and macroeconomic concerns have severely punished AMD stock, being down over 48% from its Q4 2021 high. However, he sees the risks as largely priced in. Current price levels reflect the worst outcome, which means the stock price could re-rate to higher levels if the outcomes do not come out as bad as feared.

However, the frosting on the cake (excuse the poor analogy), an important driver for AMD stock will be its data center business, integrated from the recently-closed acquisition of Xylinx, which now makes up 50% of gross profit. Moore do not see this slowing down at all, in fact, projecting the gross profit from this business trending towards 65 - 70% in the next 2-3 years. The team is optimistic that the company's prospects in data center (CPU, GPU and FPGA) will provide strong growth to drive further positive estimate revisions. 

For a price target, Moore has a $103 price target for AMD, arrived by applying a 23x multiple to their 2023 EPS estimate of $4.48.

Through the past several years, market sentiment has shifted heavily in favor of high-growth semis names, allowing multiples to expand. The market in 2022 has since softened, with multiples retracting back towards pre-pandemic levels. For AMD in particular, we have seen significant multiple contraction on a forward P/E basis. At a current forward P/E in the high-teens to 20 range, the analyst views AMD to be reasonably valued. Current multiples on this basis remain well below 3 and 5 year averages, leaving significant room vs historical comps, and approaching the lowest multiple in the company's recent history. While business conditions have started to deteriorate somewhat in the consumer end markets, given the outsized demand relative to intense product shortages, the valuation impact of this dynamic is arguably priced into current numbers. Furthermore, should estimates prove too conservative, the company could push earnings toward the $5 level in 2023, and when backstopped by a multiple that's already near historical lows, there's much more upside in shares.