Will Advanced Micro Devices, Inc. (NASDAQ:AMD) beat the Street, or will it leave momentum-seeking traders at the altar once more tonight when it announces second-quarter earnings? That’s the only question that matters right now for AMD stock, which has endured an up-and-down year to rack up 22% gains year-to-date.
And the last thing shareholders need from AMD earnings is some negative surprise — a buzzkill at this point in the company’s evolution under CEO Lisa Su.
Expectations for AMD Earnings
On the top line, analysts expect second-quarter 2017 revenue of $1.16 billion, 12.6% higher than the same quarter a year earlier. On the bottom line, analysts expect Advanced Micro Devices to break even.
In the same quarter last year, the company lost 5 cents per share, so anything better than breakeven likely would see AMD stock jump considerably. As far as downside risk goes, if the company loses more than the same 5 cents it lost in Q2 2016, expect a significant drop in response.
Anything in between is likely to have little effect on the stock.
Turning the Corner
CEO since October 2014, Su immediately pushed AMD in a different direction, opting to design high-performance chips for gamers and the enterprise like Ryzen, Epyc and soon-to-be released Vega.
She has done a remarkable job bringing the company back from the dead.
“In the context of a company where 18 months ago the concern was, are they going bankrupt or not, she’s doing a really good job,” Bernstein Research analyst Stacy Rasgon said in June. “But I have too much history with AMD to bet on their execution.”
The four most dangerous words in the history of finance?
“This time is different.”
The Long Case
AMD supporters swear that Su has turned the company into a business that can compete with Intel Corporation (NASDAQ:INTC) and Nvidia Corporation (NASDAQ:NVDA).
“According to Zdnet, PassMark testing rose to 26.2% for AMD CPUs. This is up from 17.8% last year,” wrote InvestorPlace’s Chris Lau on July 15. “This could only mean that AMD is taking market share from Intel.”
Lau believes AMD stock provides good value at current prices arguing all the positive news expected over the next 12-18 months hasn’t been factored into its share price.
If that’s true, my prediction in May that NVDA stock would hit $200 before Advanced Micro devices hits $16 is unbelievably off the mark. In my most recent article about the chipmaker, I did loosen my negative opinion of the company by suggesting that if AMD is able to grow revenue and boost gross margins into the mid-40s — where they were the last time Advanced Micro was consistently profitable, between 2009 and 2011 — hitting $20 shouldn’t be a problem.
When that happens is the million-dollar question.
The Short Case
Those short and long AMD stock have hugely divergent opinions about the company’s future. Like all things in life, the truth is somewhere in between.
While not short Advanced Micro Devices, InvestorPlace’s Luke Lango believes that its share price has gotten ahead of itself given the relatively benign revenue growth exhibited in its most recent quarterly report.
“Despite all the fanfare surrounding new products launches and secular market trends, Advanced Micro Devices’ revenues only grew 18% in Q1. I say only because Nvidia saw revenues jump 48% year-over-year in Q1,” wrote Lango on July 18. “In other words, AMD really isn’t a big topline grower, but rather a steady topline grower.”
The reality is that AMD trades at 3 times sales, and while that’s not ridiculously expensive relative to its peers, it is much higher than its historical norm.
Longo’s right when he says investors might want to wait to get its stock when it’s a better value.
Bottom Line on AMD Stock
Maybe this time it is different. Maybe AMD is going to continue to be a bigger player in the chip market at margins that produce much greater profits.
If, if, if.
The great thing about stocks is you don’t have to buy them. Your world isn’t going to be arguably worse if AMD announces strong earnings Tuesday and its stock jumps 25% Wednesday and becomes prohibitively expensive. You just move on to the next possibility.
Frankly, long or short, I wouldn’t want to be in your shoes tonight around 5 p.m., because this could be a make-or-break quarter for both camps.
If you don’t own AMD stock but are thinking about it, I would wait until after the earnings announcement. There’s just too much volatility built into this stock at the moment.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
