With tech stocks fetching rich valuations, there is little room for error. Just look at shares of Advanced Micro Devices (NASDAQ:AMD). On news of its recent earnings report, AMD stock plunged 10%.
It’s true that the AMD share price is still up a sizzling 65% for the year, making it one of the top performers among tech stocks. Yet the drop still shows that the company has its issues.
So, let’s take a look at the quarter. Net income went from $116 million, or 11 cents a share to $35 million, or 3 cents a share. This haul beat Wall Street’s expectations by 3 cents a share. On the top line, revenues fell from $1.76 billion to $1.53 billion. Yet the consensus was calling for $1.52 billion.
But of course, the real problem for AMD stock was the guidance. For the current quarter, the company’s revenue forecast is for $1.75 billion to $1.85 billion. This compares poorly to Wall Street’s more robust $1.94 billion.
One of the reasons for the deceleration is the disruption from the U.S.-China trade war. Also, competitive pressures from rival Intel (NASDAQ:INTC) have taken the shine off the AMD share price.
Yet perhaps the biggest problem for AMD stock is the gaming market. It looks like sales are trailing off as customers are waiting for new consoles from Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE). Keep in mind that the impact from this has overshadowed the growth in AMD’s EPYC and Radeon chip revenues.
AMD Share Price and Q2 Highlights
Despite all this, it’s important to note that AMD continues to push innovation. In the quarter, the company launched high-performance CPUs (central processing units) and GPUs (graphics processing units) as well as scaled 7-nanometer processors for PCs, gaming and data centers.
Here are some other notable events for the quarter:
- The company entered a multi-year strategic agreement with Samsung, which will license AMD’s graphics technology for mobile applications and smartphones.
- AMD announced its X570 chipset for providing the first-ever PCIe 4.0 ready platform for consumers. There will be over 50 motherboards from manufacturers.
- AMD also announced RDNA, which is a new gaming architecture for PCs, consoles and cloud platforms. The chip technology has 1.25-times the performance of the previous generation.
- The company plans to work with Cray (NASDAQ:CRAY) — which has recently agreed to merge with Hewlett Packard (NYSE:HPE) — to create the world’s fastest computer, called Frontier. It will use AMD EPYC CPUs and Radeon Instinct GPUs that leverage AI (artificial intelligence).
- Microsoft will use AMD chips for its next-generation gaming console, Project Scarlett.
- Apple (NASDAQ:AAPL) will use AMD Radeon Pro Vega II GPUs for a new Mac Pro system.
Bottom Line on AMD Stock
The gaming market is likely to be a drag for some time. Consider that the 2019 revenue forecast is for mid-single digit growth.
But the gaming market will ultimately provide a strong catalyst when the consoles are launched. And yes, AMD’s innovations have positioned it nicely to capitalize on this.
In the meantime, AMD should continue to see momentum in its other categories, especially in the data center. This is a huge opportunity for the company.
For example, here’s what Wells Fargo analyst, Aaron Rakers, had to say after the earnings: “While AMD’s slightly tempered 2019 outlook will likely put some pressure on shares…we think our positive thesis on AMD as a 2H2019 7-nanometer third-generation Ryzen, Radeon RX 5700, and second-generation Epyc Rome server CPU product-cycle momentum/upside story is unchanged.” His price target is $40
So all in all, I think the recent drop in AMD stock is a good entry point: that is, for those investors with a long-term bent.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.