Advanced Micro Devices' (AMD's) (NASDAQ: AMD) stock recently surged to its highest levels since early December after the chipmaker's fourth-quarter earnings report. The double-digit rally was surprising, since AMD's numbers and guidance were mixed.
AMD's revenue rose 6% annually to $1.42 billion, which missed estimates by $20 million. Its non-GAAP net income rose more than tenfold to $87 million, or $0.08 per share, which met expectations. On a GAAP basis, AMD generated $38 million in net income, compared to a loss of $19 million a year earlier.
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For the first quarter, AMD expects its revenue to fall 24% annually, compared to the consensus forecast for an 11% drop. AMD didn't provide any bottom-line guidance, but it should remain profitable by both GAAP and non-GAAP metrics as it gains $60 million in IP licensing revenues during the quarter.
AMD's post-earnings rally was likely sparked by three things: its consistent profitability, which led to its most profitable year since 2011; low expectations after Intel (NASDAQ: INTC) and NVIDIA (NASDAQ: NVDA) posted weak numbers; and shorts covering their positions (14% of the float was being shorted on Jan. 25).
However, AMD still remains well below its 52-week high of $34. So is it finally time to buy AMD? Or will this enthusiasm fade as investors focus on its other headwinds?
The key numbers
AMD splits its business into two core segments: computing and graphics, which sells its Ryzen x86 CPUs and Radeon GPUs, and EESC (enterprise, embedded, and semi-custom) chips, which include SoCs (system on chips) for gaming consoles like the PS4 and Xbox One and its Epyc data center chips. Here's how those two businesses fared last quarter.
Q4 2018 Revenue
Computing and graphics
Source: AMD Q4 earnings report.
AMD attributed the steady growth of its computing and graphics business to robust sales of its Ryzen CPUs, which gained market share against Intel's CPUs for five straight quarters. That strength offset the softer sales of AMD's Radeon GPUs, which were impacted by the downturn in cryptocurrency prices.
The EESC business was weighed down by seasonally lower demand for gaming consoles and the absence of IP-related revenues, which offset its "significant growth" in its Epyc data center revenues. That growth notably contradicted Intel and NVIDIA's recent warnings about decelerating data center chip sales.
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During the conference call, CEO Lisa Su noted that AMD's data center revenues would remain "lumpy" but added that the business was "beginning to contribute meaningfully" to its financial results. AMD's Epyc data center CPUs cost less than Intel's Xeons, so tighter data center budgets could help AMD crack Intel's near-monopoly in that market.
Rising operating profits and expanding margins
AMD's non-GAAP gross margin rose seven percentage points annually to 41%, thanks to higher sales of Ryzen and Epyc chips. It generated $109 million in non-GAAP operating income during the quarter, up from just $19 million a year earlier.
The computing and graphics unit's operating income more than tripled annually to $115 million, thanks to higher average selling prices for desktop and mobile CPUs. The EESC unit narrowed its operating loss from $13 million to $6 million, as higher Epyc cross-sell revenues were offset by lower semi-custom revenue and higher investments in its server business.
A mixed outlook
AMD's forecast for a 24% annual sales decline for the first quarter is disappointing, and it's mainly attributed to the gaming GPU inventory issues caused by the declines in cryptocurrency prices. Miners flooded the market with used cards, which caused prices to tumble and demand for new cards to dry up. That's also why NVIDIA recently warned that its revenue would drop 24% annually during the fourth quarter.
AMD also expects its semi-custom revenues to remain lower year over year, likely due to lower console sales, as sales of its Ryzen, Epyc, and Radeon data center GPUs rise. It expects its gross margin to remain steady at about 41% for the quarter and to rise above that threshold for the full year. Incoming IP revenues from its JV in China should also strengthen the EESC unit.
AMD expects its revenues to rise by the high single digits for the full year, which is well below analysts' prior forecasts for double-digit growth. It didn't provide any earnings guidance, but it will also likely miss analysts' estimates for nearly threefold growth.
So is it time to buy AMD?
Despite those issues, AMD clearly turned things around over the past three years, as it struck back at NVIDIA with cheaper gaming GPUs and challenged Intel with more cost-effective CPUs. It also maintained its dominance of the niche market for gaming console APUs.
AMD's future looks bright, but its stock also doesn't look cheap at nearly 40 times next year's earnings. Therefore, I think it might be wise to wait for AMD's post-earnings rally to cool off before starting a new position in this rebounding stock.
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