Advanced Micro Devices, Inc. Stock Is Going the Wrong Way

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AMD stock - Advanced Micro Devices, Inc. Stock Is Going the Wrong Way

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Advanced Micro Devices, Inc. (NASDAQ:AMD) and AMD stock remind me of the movie Planes, Trains and Automobiles with Steve Martin and the late, great John Candy.

Have you seen the movie? If so, remember the scene where Martin and Candy are driving on the wrong way on the highway? A driver on the other side of the median, who is traveling in the right direction, tries to warn them.

He says we’re going the wrong way,” states Neal Page, played by Martin. Candy’s character, Del Griffith replies, “Oh, he’s drunk. How would he know where we’re going?”

Back in May, I predicted that Nvidia Corporation (NASDAQ:NVDA) would hit $200 before AMD stock hit $16. Yes, I know, anyone can make predictions and I had a 50% chance of being right.

What Happened to AMD?

When I made that prediction, the AMD stock price was almost $11. Never in my wildest dreams did I think it would be back trading at these levels six months later.

Sure, I thought NVDA stock was the better buy, but that didn’t mean I saw AMD stock going off a cliff.

What’s happened to AMD? The longs were so confident that business was heading in the right direction. 

InvestorPlace contributor Laura Hoy, who I believe provides excellent investment analysis, gave readers a very positive outlook on AMD stock two weeks before its Q3 2017 earnings.

AMD stock is certainly not cheap and it doesn’t come without some risk. At $13 per share, some are waiting for a pullback in order to buy,” Hoy  wrote October 10. “However, I see AMD’s third-quarter earnings highlighting the firm’s forward momentum and sending the stock higher, making now a good time to buy in to benefit from the earnings pop.”

As we all know by now, there wasn’t a pop but rather a thud as its earnings outlook was disappointing.

I’m not calling out Hoy for the recommendation. I’ve made so many badly-timed calls you could wallpaper your den with the printouts of those recommendations. It’s part of the business.

However, it is interesting that AMD provided disappointing guidance for the fourth quarter. That was after all the good news emanating from its Ryzen CPUs and Vega GPUs.

AMD’s Growth Slowing

AMD’s third-quarter year-over-year results were top drawer, with revenue up 26%. Operating income delivered a $419 million turnaround from a $293 million loss in Q3 2016 to a profit of $126 million a year later.

For a company that’s had operating losses four out of the last five fiscal years, it’s a big step forward.   

Unfortunately, as InvestorPlace’s Luke Lango discussed a couple of days after earnings, the selloff in AMD stock was warranted.

“When you’re trading at more than 40 times next year’s earnings estimates, you need to have an accelerating growth story to support a higher share price. But AMD’s growth story isn’t accelerating anymore,” Longo wrote October 26. “Revenue growth next quarter is projected to be the same as this quarter, and that actually represents a significant sequential decline in revenues. Next year, revenue growth is expected to come down meaningfully.”

The argument from those long AMD stock is that the company is delivering better products than its competitors. It is also taking market share and producing a profit while doing so.

That might very well be true, although AMDs Q4 guidance indeed suggests this won’t be nearly as accurate a statement entering 2018.

In my May article, I stated that Nvidia had generated $4.6 billion in operating profits over the last five fiscal years, compared to a loss of $2 billion for AMD over the same period. In my mind, there was no question which was the better company, hence my prediction.

AMD expects to generate approximately $78 million in non-GAAP operating income in the fourth quarter [$1.4 billion in revenue (Q3 2017 revenue of $1.64 billion less 15% times 35% gross margin less $410 million in operating expenses)], 200% higher than in the same quarter a year earlier.

Nvidia announces its Q3 2018 earnings November 9 after the markets close. Investors, especially those holding AMD stock, will be eager to hear its outlook on the final quarter of the year.

Bottom Line on AMD Stock

Is a 200% increase in operating income going to be enough to stop the AMD slide? Well, that depends on how investors view that gain.

If it delivers $200-plus million in non-GAAP operating income, it would be the company’s most profitable fiscal year since 2011. However, if investors view this as the best they can hope for with losses returning in fiscal 2018, it’s very likely to continue dropping into single digits.

When will that happen?

Maybe as early as Nov. 9.   

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/advanced-micro-devices-inc-stock-is-going-the-wrong-way/.

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