Advanced Micro Devices (NASDAQ:AMD) has been on a tear for much of this year. In September, AMD stock hit levels not touched since 2006, after a triple-digit rise in value since the start of 2018. The company reported third-quarter 2018 results yesterday and the party came to a quick end. AMD shares closed down 9.17% and have been down as much as 25% in after-hours trading.
While many things went right for AMD this quarter, crypto miners simply stopped buying GPUs and that took the wind out of the company’s consumer graphic card sales.
Advanced Micro Devices Third-Quarter Earnings Disappoint
In Q2, AMD reported its best earnings in seven quarters, and said it was expecting Q3 revenue in the $1.7 billion range. Those numbers helped AMD stock continue an impressive climb, eventually flirting with $33 in mid-September — a level not seen by AMD investors since May of 2006.
On Oct. 24, AMD delivered its Q3 2018 earnings and the market reaction was the opposite to what happened after Q2. There was some good news: Gross margins increased again, to 40%; net income was up significantly; Ryzen PC chips were driving strong revenue growth. However, while revenue was up 4% compared to 2017, it came in at $1.65 billion, which was lower than expected.
But that’s not the real reason investors are punishing AMD stock …
Bitten by the Crypto Slump
AMD and its graphics card rival Nvidia (NASDAQ:NVDA) have benefited tremendously from a boom in cryptocurrencies like bitcoin and Ethereum. Crypto miners snapped up graphics cards to use in powerful mining rigs, driving demand to the point where AMD and Nvidia had a hard time manufacturing enough cards to keep their mainstream customers (primarily PC gamers) supplied. Both companies have been forced to limit sales of their video cards to one or two per customer in an effort to prevent crypto miners from wiping out stock with bulk purchases.
Those crypto sales have helped to drive the stocks of both AMD and Nvidia this year, but that market is volatile. Since the start of 2018, cryptocurrencies have lost around 75% of their value. That makes it unlikely that anyone is going to buy up expensive graphics cards for a new mining operation. Nvidia already warned investors that crypto sales would be “immaterial” for the second half of 2018. And now the crypto slump has caught up to AMD.
In its Q3 earnings report, the company noted:
“Blockchain-related GPU sales in the third quarter were negligible. In the third quarter of 2017, blockchain-related GPU sales were approximately high single digit percentage of total AMD revenue. The quarter-over-quarter decline was due to significantly lower graphics revenue driven by high channel inventory, partially offset by higher Ryzen processor revenue.”
In other words, the market for graphics cards got slammed when crypto miners (that’s the “block-chain-related” reference) stopped buying. The extra volume of graphics cards AMD had pumped into the retail channel to meet that demand means there is now excess inventory.
In addition, in its outlook for next quarter, AMD states that blockchain-related (cryptocurrency) sales accounted for a “low double-digit percent of overall AMD revenue” for Q4 2017. That’s 10% or more of AMD’s total revenue for the quarter that’s expected to evaporate. AMD is still predicting 8% year-over-year revenue growth, but the warning about the loss of crypto revenue for the next quarter added fuel to the flames.
As a result, AMD stock tanked. It’s flown high over the past year, with crypto sales pumping revenue into the company, but with crypto slumping AMD investors are discovering the downside of that volatility.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.