Advanced Micro Devices, Inc. (NASDAQ: AMD) is a global semiconductor company. The Company is engaged in offering x86 microprocessors, as standalone devices or as incorporated into an accelerated processing unit (APU), chipsets, discrete graphics processing units (GPUs) and professional graphics, and server and embedded processors and semi-custom System-on-Chip (SoC) products and technology for game consoles.
The company recently announced financial results and business progress for the 1st quarter. AMD, reported ($0.04) EPS for the quarter, meeting consensus estimates of ($0.04). The company reported revenue of $984 million during the quarter. During the same period in the prior year, the firm earned ($0.12) earnings per share. The revenues for the quarter were up 18.3% compared to the same quarter last year.
For the second quarter of 2017, AMD expects revenue to increase approximately 17 percent sequentially, plus or minus 3 percent. The midpoint of guidance would result in second quarter 2017 revenue increasing approximately 12 percent year-over-year. On the margin front, the company is expecting gross margin to be approximately 33%, lower than in the 1st quarter. The company continues to announce muted guidance, even after the launch of high yielding new products under its franchise.
While earnings and revenue of the company were largely in line with expectations, the company’s future guidance came up short of what investors were expecting. As a result, on May 2nd, the company’s stock crashed by more than 24.2%, loosing around $3 billion market capitalization.
Notwithstanding the muted results, the core fundamentals (over the longer term) of the company continue to remain stable and therefore the management can still put up a brave face. As per the company, AMD is well positioned for solid revenue growth and margin expansion opportunities across the business in the year ahead as it brings innovation, performance, and choice to an expanding set of markets.
Considering recent corrections, AMD is presently ahead of the pack, among other semiconductor & chip stocks. Moreover, modest expectations coupled with reduced valuations, has further de-risked the risk reward situation for the company.
Additionally, with a series of new launches, AMD stock could move to a growth trajectory. Vega, Project Scorpio, Ryzen 3, Naples, and the upcoming APU products launch could put the company in a relatively better position than its current state. Also, the company is set for a public announcement during May 2017 and any positive announcement about its product and technological initiatives could drive the stock price.
With the recent developments, analyst have revised their outlook on the stocks:
Firm: Rating: Price: Date:
Vetr BUY $15.16 February 6, 2017
Goldman Sachs SELL $11.00 April 6, 2017
Macquarie Underperform $10.00 May 2, 2017
The stock currently has an average rating of “Hold” and a consensus price target of $12.00.
About the Company: AMD is engaged in high-performance computing, graphics, and visualization technologies — the building blocks for gaming, immersive platforms, and the datacenter. With hundreds of millions of consumers, leading Fortune 500 businesses, and innovative scientific research facilities around the world rely on AMD technology. The company was founded by W. J. Sanders III and David John Carey on May 1, 1969 and is headquartered in Sunnyvale, CA.
Major divisions of the company: AMD operates through the following segments: Computing and Graphics, and Enterprise, Embedded and Semi-Custom. The Computing and Graphics segment includes desktop, notebook processors, chipsets, discrete GPUs and professional graphics. The Enterprise, Embedded and Semi-Custom segment includes server and embedded processors, dense servers, semi-custom SoC products, engineering services and royalties.
Critical analysis of management’ guidance: Over the past few quarters, the company’s profitability slowed down from what it was expected to be. More importantly, despite the launch of new products and better product mix; AMD’s profitability story remains constrained. Analyst’ expected relatively higher yields from the company due to Ryzen CPU which was launched at the beginning of March along with initial shipments of Vega GPUs. Also, Naples, the high-performance x86 server CPU, is due to be launched in the second quarter. Overall, the introduction of these new products should have resulted into higher gross margin guidance.
The biggest worry ahead for the management, is with the firm appearing to be unable to scale up margins vis-a-vie its peers. AMD’s CPU competitor Intel and its GPU competitor NVIDIA have relatively higher gross margin. Even Micron that had a lower gross margin a year ago had been able to catch up with its recent quarter gross margin at 38.5%. This implies that as the firm sees competitive and pricing pressure, it has been unable to sell more value-added high yielding products and or control expenses.
Therefore, to get the profitability on track, AMD needs to articulate its strategy in a more nuanced way and drive it through the organization. A sharp focus on operational efficiencies will continue to remain a key challenge for the company and management’s ability to hold margins more successfully than its competitors will be a key monitorable.
Industry outlook:
The market for desktops and notebooks is expected to remain “flat” during 2017 as against 2016, which is an improvement from sharp declines in prior years. Overall, 2017 promises to be an exciting year for servers and the competitiveness of computer offerings.
AMD’s Ryzen CPU appears competitive and could drive 2Q share gains assuming a clean ramp. AMD’s Vega GPU appears on track for 2Q launch. Additionally, the server market is expected to grow at 10% Y/Y in 2017. AMD’s Naples is expected to gain market share in this segment. It said, NVDA continues to lead the market, with as many as 100 GPUs per full rack.
Q1 2017 Results
- Earnings: Revenue of $984 million was up 18 percent year-over-year, driven by higher revenue in the Computing and Graphics and Enterprise, Embedded, and Semi-Custom business segments. Revenue was down 11 percent sequentially, due primarily to seasonality in both segments.
- Profitability: On a GAAP basis, gross margin was 34 percent, up 2 percentage points year-over-year and sequentially due to a higher percentage of revenue from the Computing and Graphics segment, as well as a richer product mix within that segment. Operating loss of $29 million compared to operating losses of $68 million a year ago and $3 million in the prior quarter. Net loss of $73 million compared to net losses of $109 million a year ago and $51 million in the prior quarter. Loss per share of $0.08 compared to a loss per share of $0.14 a year ago and a loss per share of $0.06 in the prior quarter.
- Liquidity: Cash, cash equivalents, and marketable securities were $943 million at the end of the quarter, down $321 million from the end of the prior quarter primarily due to the timing of sales and cash collections, debt interest payments, and increased inventory.
Q1 2017 Highlights
- AMD launched its first high-performance x86 Ryzen desktop processor based on the entirely new “Zen” core microarchitecture, bringing leadership multi-core performance to PC gamers, creators, and hardware enthusiasts worldwide.
Upcoming products: AMD shared new details about its upcoming server and high-end graphics solutions:
- Launching in Q2 2017, AMD’s high-performancex86 server CPU, codenamed “Naples”, exceeds today’s top competitive offering on critical parameters, with 45 percent more cores, 60 percent more input / output capacity (I/O), and 122 percent more memory bandwidth. AMD also announced collaboration with Microsoft to incorporate the cloud delivery features of “Naples” with Microsoft’s “Project Olympus” server platform.
- AMD’s VEGA GPU architectureis on track to launch in Q2, and has been designed from scratch to address the most data, and visually-intensive next-generation workloads with key architecture advancements including: a differentiated memory subsystem, next-generation geometry pipeline, new compute engine, and a new pixel engine.
Excerpts of management guidance:
- Revenue to increase 17% q/q, plus or minus 3%. The midpoint of guidance would result in a y/y increase of 12%.
- Non-GAAP gross margin to be approximately 33%, Non-GAAP operating expenses to be approximately $370 million,
- THATIC JV licensing gain of approximately $20 million
- Non-GAAP interest expense, taxes and other to be approximately $30 million, and Inventory to be down versus Q1 2017.
Key risk factors and potential stock drivers:
The company’s ability to ramp-up profitability while sustaining its revenue growth would be one of the key stock driver over the near to medium term.
The company is scheduled for product announcement during May 2017, any positive product and technological announcement would be a key trigger for the company.
The company has launched various new products during Q1 and many others are lined up for upcoming quarter. The performance of the same would have a key bearing on company’s business & financial risk profile.
Stock Performance:
On Friday, May 5th, 2017, AMD shares increased by 0.89% to $10.19 on an average volume of 61 million shares exchanging hands. Market capitalization is $9.68 billion. The current RSI is 28.19
In the past 52 weeks, shares of AMD have traded as low as $3.45 and as high as $15.55.
At $10.19, shares of AMD are trading below its 50-day moving average (MA) at $13.37 and above its 200-day MA at $9.82.
The present support and resistance levels for the stock are at $10.00 & $10.32 respectively.
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