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Why Shares of AMD Are Surging Today

Timothy Green, The Motley Fool

What happened

Shares of chip company Advanced Micro Devices (NASDAQ: AMD) soared on Wednesday following a mixed fourth-quarter report. AMD produced less revenue than expected, and its earnings were in line with analyst estimates. The company's guidance for the first quarter called for a steep revenue decline, but its solid full-year guidance gave investors reason to cheer. The stock was up about 15.2% at 11:30 a.m. EST.

So what

AMD reported fourth-quarter revenue of $1.42 billion, up 6% year over year but about $20 million below the average analyst estimate. Computing and graphics revenue rose 8.6% year over year on the strength of the company's Ryzen PC processors. The enterprise, embedded, and semi-custom segment posted flat revenue, with growth in EPYC server CPU sales offsetting lower semi-custom revenue.

A rising stock chart.

Image source: Getty Images.

Non-GAAP earnings per share came in at $0.08, up from $0.01 in the prior-year period and in line with analyst expectations. Non-GAAP gross margin was 41%, up 7 percentage points from the prior-year period, with the improvement driven by Ryzen and EPYC.

AMD's first-quarter guidance was downright awful thanks to the bursting of the cryptocurrency bubble. The company expects revenue of $1.25 billion, plus or minus $50 million, which represents a year-over-year decline of 24%. AMD is still working through excess graphics card inventory, and expected growth from Ryzen and EPYC won't be nearly enough to offset the graphics weakness.

However, AMD still expects to grow revenue in 2019. The company sees high-single-digit revenue growth this year, driven by Ryzen, EPYC, and the company's data center GPU products. That optimistic full-year outlook is likely what's driving the stock higher.

Now what

AMD will launch a new generation of Ryzen CPUs, built on a 7nm manufacturing process, sometime in mid-2019. The second generation of its EPYC server processors is also coming soon, and AMD is aiming to win a double-digit share of the lucrative data center market.

Growth from the CPU business will need to offset a slumping GPU business. AMD is going to start off 2019 with a steep revenue decline, but it's betting that a strong second half will more than offset its GPU troubles. With the stock rocketing higher, investors are buying into that story.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.