Advanced Micro Devices, Inc. (NASDAQ:AMD) is up more than 250% over the past 12 months, so the market clearly has been expecting big things from the chipmaker — the kind of success that it hasn’t created in years. They should. While AMD stock still has a valuation problem, even a quick look at its recently unveiled products make it clear that this isn’t the Advanced Micro of yesteryear.
On the other hand, at some point in time, the technology giant has to start turning its new inventions into fiscal results. But it hasn’t — at least it didn’t during its Q1 earnings release out Monday night.
Although a couple of its newly designed technologies — the Vega GPU and the Naples server CPU — haven’t yet gotten a chance to contribute to the top and bottom line, its new Ryzen CPU hit the market during its recently-completed first quarter. While AMD should be showing signs of new life by now, it’s not.
Monday’s Q1 numbers, which included a deeper-than-expected loss, stifled the rally in AMD stock in a fairly decisive fashion. The earnings miss sent shares more than 7% lower.
Advanced Micro Devices Q1 Earnings
For the quarter ending in March, Advanced Micro Devices reported a loss of 8 cents per share on sales of $984 million. That compares to a loss of 12 cents per share and revenue of $832 million for the same quarter of 2016.
Analysts were expecting a loss of 4 cents per share of AMD stock and a top line of $984.4 million, so that’s a miss on both fronts. Operating expenses were about the same.
President and CEO Dr. Lisa Su commented:
“We achieved 18 percent year-over-year revenue growth driven by strong demand for our high performance Ryzen CPUs as well as graphics processors. We are positioned for solid revenue growth and margin expansion opportunities across the business in the year ahead as we bring innovation, performance, and choice to an expanding set of markets.”
It was, for most intents and purposes, a disappointing quarter for a company. In its defense, it’s tough to handicap simply because turnaround stories are generally uneven.
On the flipside, the earnings game is one of expectations, and falling short of them can be brutal.
The company didn’t offer details about Ryzen sales during the quarter, but the Computing and Graphics’ segment’s sales were up 28% to $593 million last quarter.
The new central processing unit from Advanced Micro Devices was largely intended as a means of winning back some of the CPU market share lost to rival Intel Corporation (NASDAQ:INTC). Though the hardware was met with mixed reviews and the company has confirmed that the CPU is causing some PCs to lock up, that’s largely a reflection of a PC industry that wasn’t quite ready for such a big, and somewhat unexpected, from AMD. The initial stumbles can be fixed through software patches and updates.
Still, the snafus look bad to casual and corporate users that don’t realize a CPU isn’t exactly a plug-n-play device.
Looking Ahead for AMD Stock
Prior to the Q1 report, analysts were looking for the company to turn $1.12 billion worth of revenue into a loss of a penny per share for the quarter currently underway. Although still a loss, that loss would still mark an improvement on the loss of 5 cents per share of AMD stock booked in the comparable quarter a year earlier. That top line would also be 9.3% stronger than the Q2-2016 top line of $1.03 billion.
For the full year, analysts were expecting Advanced Micro Devices to swing from a loss of 14 cents per share to a profit of 8 cents per share, with sales to ramp up from $4.27 billion to $4.74 billion.
Advanced Micro doesn’t offer much in the way of detailed guidance, but a statement from the company along with its first quarter numbers noted, “For the second quarter of 2017, AMD expects revenue to increase approximately 17 percent sequentially, plus or minus 3 percent. The midpoint of guidance would result in second quarter 2017 revenue increasing approximately 12 percent year-over-year.”
Whatever the case, it’s become clear now that if Advanced Micro Devices is going to meet optimistic expectations of investors, it’s going to need plenty of help from its new Vega GPU, and its new Naples server CPU, both of which will be commercially launching shortly.
Vega was primarily designed to be competitive with GPU (graphics processing units) from Nvidia Corporation (NASDAQ:NVDA), which had been chipping away at a market that used to bear much more fruit for AMD.
The specs are certainly impressive enough. The underlying second-generation high bandwidth memory (or HBM2) is a stacked memory architecture that allows for a so-called High Bandwidth Cache and High Bandwidth Controller. This effectively offloads the memory work usually performed by a graphics card to that computer’s – the motherboard’s – memory, up to a ridiculous 512 terabytes worth.
Still, Nvidia isn’t rolling over. It unveiled its new GTX 1080Ti in February, and it’s going to make things tough for AMD. Both companies, however, run the risk of running into the fact that too many consumers are starting to balk at GPU card prices nearing (or even exceeding) $1000. If it becomes a price war, Advanced Micro Devices has an edge.
As for the server market, Naples (not the brand name, but the project/iteration name) can handily hold its own. What remains to be seen is how rapidly enterprise-level customers are willing to make such an upgrade. Many organizations don’t need to beef up their server power just yet, having upgraded their hardware as next-generation technology hit the market a couple of years ago.
Everyone loves a turnaround story. Not every turnaround story, however, unfurls as quickly or as effectively as initially expected. Though AMD’s turnaround story is still only in the third inning or so, it’s anything but clear how the company’s going to be able to finish.
Advanced Micro Devices has yet to justify the big run-up since this time last year, and is paying the price for it now.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.