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Why Is AMD Down 19.4% Since the Last Earnings Report?

Zacks Equity Research
While Oracle beat the Zacks Consensus Estimate for revenues and earnings, it disappointed investors with a bleak outlook.

It has been about a month since the last earnings report for Advanced Micro Devices, Inc. AMD. Shares have lost about 19.4% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

AMD reported non-GAAP earnings of 10 cents per share compared with 3 cents per share in the year-ago quarter. The figure also surpassed the Zacks Consensus Estimate of 8 cents per share.

Revenues increased 26% year over year and 34% sequentially to $1.64 billion and exceeded the Zacks Consensus Estimate of $1.51 billion. The quarterly revenue figure was also the highest since 2011, primarily driven by robust performance of the company’s product portfolio comprising Ryzen, EPYC and Radeon Vega.

Quarter Details

Computing and Graphics segment revenues witnessed year-over-year increase of 74% to $890 million. The growth was backed by accelerated sales of Radeon graphics and Ryzen desktop processors.

Operating income for this segment was $70 million against a loss of $66 million in third-quarter 2016, primarily driven by higher revenues.

Client computing revenues recorded strong double-digit growth from the year-ago quarter driven by solid demand for the expanded Ryzen processor family in the desktop market. Ryzen 5 and Ryzen 7 processors constitute around 40% to 50% of the desktop market share. Additionally, the accelerated ramp up of shipments by OEM customers prior to the holiday season has increased adoption as well.

Ryzen 3 processor has expanded the company’s foothold in the mainstream segment. Moreover, Ryzen Threadripper processors have enabled AMD to re-enter the high end desktop market. Notably, the company’s Ryzen PRO-based offerings have already been adopted by prominent commercial PC providers including Dell, Lenovo, and HP.

The company achieved record Graphics Processor Units (GPUs) revenues on the back of improved average selling price (ASP) and higher unit shipments compared with the year-ago quarter.

The company’s release of Vega-based GPUs and increasing demand for its Polaris products in both gaming and blockchain industries led to improved revenues. Launched during the quarter, Radeon RX Vega family of GPUs aimed at gaming enthusiasts has performed better than previous Radeon GPUs.

Additionally, AMD started the shipment of Radeon Instinct MI25 to major cloud data center customers and Radeon Pro WX 9100 graphics cards to the high-end content creation market during the quarter.

Notably, the company entered into a partnership with Baidu during the quarter to focus on “optimizing” software for AMD’s Radeon Instinct GPUs in Baidu datacenters. Moreover, Amazon Web Services announced that it is powering Amazon AppStream 2.0 with AMD Radeon Pro technology, aimed at driving cloud delivery of virtual applications.

Enterprise, Embedded and Semi-Custom segment revenues amounted to $824 million, almost flat year over year but up 46% sequentially. However, higher costs brought down operating income for the segment from $136 million to $84 million for the quarter.

The sequential increase in revenues was based on an increase in semi-custom revenues. Management expects the trend to continue in the holiday season.

The ramping up of EPYC datacenter processors sale to cloud and OEM customers has boosted server revenues. Management remains optimistic about this product with companies like Tencent and JD.com planning to deploy the company’s EPYC processors.

Baidu and Microsoft also announced plans of deploying EPYC based products in their hyperscale environment, which is another positive for AMD.

Margins

Gross margin increased 400 basis points (bps) to 35% year-on-year backed by a favorable product mix in the Computing and Graphics segment and IP-related revenues. Management noted that ramping up of high performance products will continue to have a positive impact on margins.

Adjusted EBITDA amounted to $191 million compared with $103 million in the year-ago quarter.

Balance Sheet & Cash Flow

AMD ended the third quarter with cash, cash equivalents and marketable securities of $879 million compared with $844 million in the previous quarter. Free cash flow was $32 million.

Guidance

Notably, fourth-quarter 2017 is a 13-week quarter while the year-ago quarter comprised 14 weeks. Management expects revenues to decrease approximately 15% sequentially (+/-) 3%. At the mid-point, revenue growth is expected to be 26% on a year-over-year basis.

Non-GAAP gross margin is expected to be 35% while non-GAAP operating expenses are anticipated to be around $410 million

The company expects 2017 revenues to witness a more than 20% increase, better than a mid-to-high teens percentage guided earlier.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimate flatlined during the past month. There have been two revisions higher for the current quarter compared to two lower.

 

VGM Scores

At this time, the stock has a nice Growth Score of B, however its Momentum is doing a bit better with an A. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum investors than growth investors.

Outlook

The stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.


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