Advanced Micro Devices, Inc. (NASDAQ:AMD) shares have dropped substantially since the company’s earnings release last week, with the company losing more than a quarter of its market capitalization. However, today, AMD stock is getting a renewed bid, bringing back a whiff of hope to the recently battered bull camp.
Today, we’ll look into exactly why AMD has been so beat up, and what investors can expect in the long-term from this up-and-coming growth play in the microprocessor space.
What Did We Learn From the Earnings Release?
Advanced Micro Devices met Wall Street expectations on both revenues and earnings, posting a GAAP loss of 8 cents per share (4 cents adjusted) and a top line of $984 million. At first glance, it appears that Q1 came and went as expected.
It’s management’s guidance for the second quarter that sent AMD stock tumbling after the release.
Guidance for margins in Q2 2017 weree reduced to 33% from the company’s current gross margin level of 34%, which posed somewhat of a shock to buy-side investors hoping for margin improvement to coincide with AMD’s burgeoning high-end Vega graphics processors making up a more significant portion of the product mix than its other products such as its Ryzen 3 processors.
Advanced Micro did post 18% year-over-year growth on its high-end graphics processors and high-performance Ryzen CPUs, though it may not be until Q3 or Q4 of this year until investors will be able to see the results begin to flow in.
The earnings guidance generally disappointed bullish investors. In an ultra-competitive oligopoly with intense competition for market share and margins, we can see how “sticky” these companies’ stock prices can be to marginal decreases in outlook for one quarter.
Expectations for sustained profitability following share price gains have been noticeably hampered
Let’s dig a little deeper here.
AMD Needs High-End Market Share Gains
First of all, on a seasonally adjusted basis, the latter half of the year tends to be much better for companies such as AMD, with new game and console releases typically coinciding with graphic cards and processor upgrades.
In that respect, Advanced Micro has a few potentially lucrative products that will likely provide a real impact to AMD stock in Q3 and Q4 of this year.
Advanced Micro Devices’ Radeon line of GPUs have been released in Q1, and is expected to grow substantially over time with the rise of virtual reality and the increased performance needs of gamers migrating to this space. This is one segment AMD has focused significant effort on, and may be rewarded in a big way as the needs of consumers and VR-related companies expand over time.
Additionally, Microsoft Corporation (NASDAQ:MSFT) has previewed the technology for its newest Xbox console codenamed “Project Scorpio” which boasts state-of-the-art graphics technology suited for 4k. This project is claimed to be “ahead of target,” however many analysts expect this console to impact earnings materially in 2018.
With a strong pipeline of products currently being integrated into select high-margin niches, I expect that while second-quarter numbers may disappoint and fall in line with lower-than-expected guidance, Q3 and Q4 may turn out to be better than expected for investors who are willing to take the risk and jump in on this most recent market dip.
Bottom Line on AMD Stock
The new high-end products released by AMD are likely to take some of the competitive market share away from industry leaders NVIDIA Corporation (NASDAQ:NVDA) and Intel Corporation (NASDAQ:INTC), although it may take some time for results to materialize.
The selloff with respect to AMD stock is somewhat warranted, given worries about over-valuation. However, the future appears to be bright for this company, and Wednesday’s rebound is providing hope for the short-term.
I remain intrigued with respect to how the rest of the fiscal year will turn out.
As of this writing, Chris MacDonald did not hold a position in any of the aforementioned securities.