Advanced Micro Devices (NASDAQ:AMD) stock has been on a roll after posting impressive second-quarter earnings. The chipmaker posted a surprise profit (analysts expected a breakeven Q2), and revenues grew by more than 18% to beat the Street, sending AMD stock back on its northward path — at least for a time.
AMD had robust performance by its Computing and Graphics segment to thank for that double beat. Segment sales were up an impressive 51% year-over-year to $659 million and 24% sequentially. Operating income returned to the green to the tune of $7M compared to last year’s $81M loss. According to the company, these improvements came courtesy of a favorable pricing and product mix (read: new Ryzen desktop processor chips).
The computing segment has been under pressure for many quarters due to a severe downturn in global PC shipments. The division finished with revenue of $1,967 million in 2016, nearly 40% lower than 2014 sales.
So last quarter was impressive enough, and Wall Street rightly termed it a ”blowout.” Unfortunately, AMD stock has once again failed to hold on to its post-earnings gains — a clear indication that it remains a major battleground stock.
Gaming Segment Underperforms
This time though, Wall Street is off the hook for the selloff.
Most analysts gushed about the earnings and remain bullish on AMD stock with nine buy ratings, 12 holds and just three sells. There’s one exception, though: Canadian-based BMO Capital stood out by taking a more cautious stance and downgrading AMD stock due to concerns regarding high earnings leverage, higher-than-expected expenses and negative cash flow.
Interestingly, it almost went unnoticed that AMD’s gaming segment — usually its strongest — performed poorly during the quarter. Advanced Micro Devices reports sales of gaming processor chips under the Enterprise, Embedded and Semi-Custom segment. Sales for the segment were down 5% to $563 million during the quarter, breaking a long streak of uninterrupted growth. Segment operating income dropped dramatically from last year’s $84M to $42M.
Management blamed the lackluster sales on lower SoC sales and the lower profits on higher R&D in datacenters. That should ring the tocsin for investors because the gaming segment normally provides the bulk of AMD’s revenue and profits: 2016 revenue was $2,305 million vs. $1,967 million by the computing segment while operating income clocked in at $283 million compared to a loss of $238 million by the computing division.
Advanced Micro supplies APU processors for Microsoft Corporation’s (NASDAQ:MSFT) Xbox One and Sony Corp (ADR)’s (NYSE:SNE) PlayStation.
Nintendo Switch a Weight on AMD Stock
About six weeks ago, I warned that AMD bears were not showing Nintendo Co., Ltd. (ADR)’s (OTCMKTS:NTDOY) new gaming console, the Switch, the respect it deserves. You can chalk that up to the fact that Nintendo has remained an also-ran in the console wars for a long time.
Sales by the hybrid home/handheld Switch console though have been extraordinarily strong since its March launch. The Switch even managed to comfortably outsell Xbox One and PS4 after moving 2.74 million during the first month of availability. It was a crazy sales clip that made the device one of the fastest-selling consoles of all time.
The popularity of Nintendo’s latest console might help explain why Advanced Micro Devices’ gaming business has come under pressure lately. The device provides a much-better playing than your standard smartphone but also allows the user to play games on the go–something traditional consoles such as Xbox and PS4 cannot do. It would not be a stretch to suspect that some gamers from the old camps have literally taken up the moniker’s challenge to Switch to the new gaming experience.
And that’s too bad for AMD stock because its archrival, Nvidia Corporation (NASDAQ:NVDA), has been tasked with supplying APU processors for Nintendo’s newest console.
Epyc to the Rescue
Investors though can take some comfort in the fact that Sony finally showed Nintendo who’s boss after releasing the gold PS4 Slim for $250 on June 9. The device has been selling very well, and has helped the PS4 camp reclaim its No. 1 position in the console space. You can expect AMD’s gaming division to resume growth as the quarters roll on.
But perhaps the biggest reason why investors should give AMD stock a get-out-of-jail-free pass is the fact that sales of the company’s new server chip, Epyc, did not feature anywhere in that report.
Epyc is a two-socket server chip that’s been receving good reviews, and is looking to make hash out of Intel Corporation’s (NASDAQ:INTC) Xeon lineup. AMD’s fabless model should help it to nicely scale production of the new chip without the high development costs of the Opteron era as I explained here.
If Advanced Micro manages to grab just 5% of the server processor market, one that’s almost wholly owned by Intel, over the next 12 months, expect AMD stock to make new lifetime highs.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
