Every industry has to deal with the challenge of the “next new thing.” Advanced Micro Devices (NASDAQ:AMD) is no different — though in its case, there’s a “hurry up and wait” element for that next new thing. Major video game consoles are late into their cycles, and demand for the company’s core graphic processing units (GPUs) is falling as consumers wait for the new versions to launch. However the good news for AMD stock is that any disruption to sales should be temporary.
The company is well positioned for 2020 and beyond.
By now, investors know the tale of the tape. AMD reported earnings that saw a 13% decline in year-over-year revenue. The revenue dip coincided with a four-percentage-point reduction in operating margin. The chip manufacturer is forecasting an 18% increase in revenue in Q3 2019. This number was within their guidance range, and represents about a 9% year-over-year increase. Despite that forecast, investors soured at a number that was still about $1.5 billion short of analysts’ expectations.
Predictably, AMD stock fell as the company warned its annual guidance would be in the mid single digits. This was a decline from an earlier forecast of high-single-digit growth.
Advanced Micro Devices CFO Devinder Kumar said in the earnings conference call:
“For the full year, we now believe revenue will increase mid-single-digit percent over 2018, driven by significant sales growth of our new Ryzen, EPYC and Radeon processors, partially offset by lower-than-expected semi-custom revenue. Revenue, excluding semi-custom, is expected to increase approximately 20% year over year.”
Gamers Are Waiting for New Gaming Consoles to Launch
The reason for the miss was a disruption in sales for its graphics card. The company’s initial forecast saw demand for the company’s GPUs rising because they are essential for mining cryptocurrency. However, that demand did not come to pass as cryptocurrencies got off to a rough start in 2019.
But the lower demand for their GPUs was also evident in the gaming segment. Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE), who manufacture the Xbox and PlayStation consoles respectively, are forecasting softer demand. Consumers are apparently waiting on the new next-generation hardware that is launching in 2020 or 2021.
I experienced this firsthand when my son passed on buying a PlayStation before heading off to college. He isn’t being frugal. He just knows there will be a new one next year.
Short-Term Pain Looks to Be Passing
Apple (NASDAQ:AAPL) is facing the same speed bump with softening iPhone sales throughout 2019 as more consumers wait for 5G phones to launch in 2020. This is where Qualcomm (NASDAQ:QCOM) comes in. The chip maker recently resolved a legal dispute regarding licensing issues between the semiconductor company and Apple. The result is that Qualcomm will be providing chips for the iPhone for a minimum of six years. And Apple is expecting sales to pick up in 2020, which is a win-win for both Apple and Qualcomm.
What does that have to do with AMD and, more importantly, AMD stock? Microsoft and Sony project a turnaround in demand for their gaming consoles in 2020. It appears both devices will feature AMD chips which should provide room for AMD’s revenue to grow. The company is gaining market share in this critical segment from rival Nvidia (NASDAQ:NVDA). That gap may widen as more consumers switch over from PC-based games to gaming consoles.
AMD Stock Has a Lot Going For It
In addition to the expected growth in the GPU segment, AMD recently released its Ryzen processors which the company says will combine low power consumption and superior performance which should give the company a boost in the central processing unit (CPU) space. And AMD stock may get a lift in their data center sales as their new server processor, Rome, is now shipping.
The point of this is that the decline in the stock is probably due more to profit taking than to investors losing confidence. Even after the steep, post-earning sell off, Advanced Micro Devices is up over 65% in 2019.With an unsure outlook for the remainder of 2019, it was logical that investors would look to take some profits. However the problems for the company look to be short-term and that provides significant opportunities going forward.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
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