Last week, shares of Advanced Micro Devices, Inc. (NASDAQ:AMD) hit a major speed bump. While both the revenues and profits came in-line with the consensus estimates, this was not what Wall Street wanted to see. After all, AMD stock had been surging during the past year in anticipation of a rip-roaring turnaround.
So what can investors expect now? Might Advanced Micro Devices stock be a good buy — or should there be caution?
I actually think there is more upside potential.
Let’s face it, turnarounds can be choppy. What’s more, the company’s product launches are still in the early phases.
Note that the Ryzen 7 CPU did not hit the markets until the first week of March and the Ryzen 5 chip was not launched until the middle of April. Yet there was still enough momentum to help pump up the top line. During the quarter, the Computing and Graphics segment saw revenues jump by 29% and the operating loss dropped from $70 million to $15 million on a year-over-year basis.
But as for AMD stock, investors are instead looking at other parts of the earnings report, such as the margins. They came in at 33% in the latest quarter, down from 33% in Q4. Advanced Micro Devices is also forecasted to remain 33% for the current quarter.
However, it is important to keep in mind that it is normal for there to be margin pressures when a company is in the midst of product launches. In other words, it will take time for the economies of scale to kick in.
Another nagging issue for AMD stock is the company’s lackluster guidance. Revenues are expected to increase by 17%, plus or minus 3%.
Shouldn’t these numbers be better — especially in light of the multiple product launches? Not necessarily.
First of all, it does take time to get the chips into the channels, such as with the need for testing and evaluations. Beside, Advanced Micro Devices has a long history of flubs and misfires. So yes, customers will likely have some skepticism.
Something else: The first two quarters of this year will be lackluster anyway because of seasonality. This time of the year is generally a low point when it comes to sales for desktop PCs, laptops and notebooks.
But for AMD stock, there is more than just about the Ryzen chipset.
The company plans to launch the following chips in Q2:
- Naples: This is focused on the lucrative datacenter market, which is dominated by Intel Corporation (NASDAQ:INTC). According to the AMD earnings call, CEO Lisa Su noted: “We are in the final stages of preparation in advance of launch and are very pleased with the status of our silicon and customer engagements. We have now seated thousands of Naples processors across an extensive set of OEMs, end users and partners, and remain on track for our first Naples products to launch this quarter.” It also helps that AMD has a strategic relationship with Microsoft Corporation (NASDAQ:MSFT) to embed Naples into the “Project Olympus” server platform.
- Vega: This is a next-generation architecture for the GPU market. The chip has made significant advances in memory subsystems, compute engines and pixel capabilities. Overall, the Vega is poised to potentially take share from the dominant operator in the category, Nvidia Corporation (NASDAQ:NVDA).
Bottom Line on ADM Stock
I’ve been bullish on AMD stock for some time. In fact, I think that Su is one of the top CEOs in the tech world. After all, during the past few years, she has saved the company from oblivion and now has positioned the company to benefit from various substantial market opportunities, such as with the datacenter, gaming and even artificial intelligence.
So with the latest drop in Advanced Micro Devices, it should not be something to fret about. It’s instead an opportunity to pick up shares at a much better valuation.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
