AMD downgraded by Goldman Sachs as too rich

Advanced Micro Devices Inc. shares sank Thursday following a downgrade by a Goldman Sachs analyst who said that the chipmaker's stock is too expensive.

THE SPARK: Goldman Sachs analyst James Covello downgraded his rating on AMD stock to "Sell," from "Neutral," saying he thinks a recent rally will fade.

THE BIG PICTURE: AMD's shares have gained recently on hopes that the company can make money from chips for video game consoles such as the Xbox, Covello said. The company's stock price rose 83 percent in 2013, compared with a 16 percent increase in the S&P 500 during that time.

AMD is the world's second-largest maker of microprocessors behind Intel Corp. But both companies are struggling with a shift in consumer demand away from personal computers, which use their chips, toward smartphones and tablets.

THE ANALYSIS: AMD's latest rally won't last, as similar rallies have faded in the past few years, Covello said. He expects disappointing results in its PC segment, which he estimates will make up 45 percent of this year's sales, to offset increased revenue from gaming chips.

SHARE ACTION: Shares of AMD fell more than 13 percent to $3.80 by late afternoon. Its stock was trading above $6 at this time last year before it started a multi-month plunge. But shares have rallied recently, jumping 55 percent in May.