Advanced Micro Devices (NASDAQ:AMD) reports earnings on Tuesday, Jan. 29, after the bell. The Santa Clara, California-based chip company will report earnings for both the fourth quarter of 2018 and the subsequent full year. AMD stock has seen its fortunes rise early last year only to drop in the fall amid a slump in tech stocks.
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To be sure, AMD faces more of a temporary setback. The AMD stock price should move higher long term, but only when the market works through the oversupply in chips. Hence, investors should approach this report with a focus on chip supplies rather than earnings numbers.
Expect Quarterly Stagnation, Annual Growth
On a non-GAAP basis, Wall Street projects consensus fourth-quarter earnings at 8 cents per share. The company also earned 8 cents per share in the same quarter last year. Analysts also expect $1.45 billion in revenue. If that figure holds, it will represent a 2.3% drop from the fourth quarter of 2017 when AMD brought in $1.48 billion.
Annual results should offer more positive gains. Wall Street consensus earnings stand at 46 cents per share for 2018. The chipmaker earned 17 cents per share in 2017. Projected 2018 revenues of $6.5 billion should come in 22.1% higher than the $5.3 billion in sales AMD saw in 2017.
AMD stock still faces the lingering effects of both a U.S.-China trade war. Declining interest in crypto mining and a fall slump in tech equities also weighed on AMD stock. This showed in last quarter’s results as the firm missed third-quarter revenue estimates.
Advanced Micro Devices has mostly recovered from the slump following the revenue miss. However, the AMD stock price of around $22 per share still comes in about 35% below the 52-week high.
AMD Needs Time
Without question, the dramatic drop in demand interrupted the recovery of AMD. In the previous earnings report, CEO Lisa Su said, “it might take a couple more quarters to get back to a normal channel” regarding its GPU sales. Hence, investors will look intently on how long oversupply will remain a concern. How AMD stock reacts following the earnings report will probably hinge on this progress.
I would caution against buying into this report, and not only because of supply. For now, AMD stock faces a 34.1 forward price-to-earnings (P/E) ratio. That might suffice in a high-growth environment. However, with stagnant earnings growth, it comes in on the high side. Also, with the forward P/E of Intel (NASDAQ:INTC) at 10.3 and Nvidia (NASDAQ:NVDA) trading at 22.5 times forward earnings, AMD does not compare well to its direct peers.
Once the chip glut ends, that could become a different story. In her speech at CES, Su made it clear that AMD will challenge Intel and Nvidia for dominance in the PC, graphics and servers. If recent product releases serve as an indication, Intel and Nvidia will have to take this threat seriously. Moreover, as the demand for chips begins to increase again, AMD should resume its double-digit growth. However, that equity growth will come from sustained earnings increases, not from knee-jerk reactions following an earnings report. For this reason, I recommend approaching this report as an observer rather than as a stakeholder.
Concluding Thoughts on AMD Stock
Investors should look for signs that the chip glut will soon end when the company reports fourth quarter and annual earnings Tuesday. Like its peers, AMD stock fell as declining interest in crypto mining left the semi industry with unexpectedly high supply levels. This weighed on AMD and most chip stocks.
The fourth-quarter earnings report will probably show progress in this area. However, it will likely take more quarters to work off the oversupply. Also, the stagnant profit growth makes AMD’s elevated P/E ratio harder to justify.
In many areas, AMD’s PC, graphics and server chips lead their peers. Once the oversupply situation ends, profit growth should again make the company a viable investment. However, as long as revenue and profit growth stagnate, AMD stock remains a hold at best.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
