(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Advanced Micro Devices, Inc. (AMD) options traders are betting on a surge in volatility after the company reports first-quarter results on April 25 after the close of trading. Options are currently pricing in a rise or fall of nearly 14% by expiration on May 18. It is a massive price swing and is a far more substantial range of volatility than even Amazon, which is known to have a history of delivering results that miss or beat analysts estimates by a wide margin. (See also: Amazon's Stock Faces Giant 10% Swings on Earnings.)
Analysts are looking for revenue to climb by over 59% to $1.57 billion, while earnings forecasts are flat versus last year at $0.09 per share. That is a massive gap between earnings and revenue forecast for growth rates, and that means AMD may deliver a big beat or big miss when those results come on Wednesday after the close of trading.
The options set for expiration on May 18 are implying a rise or fall in the price of AMD's stock of 13.5%, placing shares in a massive trading range between $9.30 to $11.70 from the $10 strike price by the time expiration comes around. But the number of puts outweigh the calls by a ratio of nearly 2 to 1, with 53,700 open puts contracts to only 26,200 open calls contracts, and would indicate some are betting shares will fall, following results. But there is also significant open interest for the $11 and $12 strike price calls with nearly 84,000 and 78,000 open calls contracts, respectively, suggesting a stock price rise.
History of Beats and Misses
Since the second quarter of 2017, AMD has been delivering significant beats when it comes to estimates, with earnings beating estimates last quarter by nearly 63%. But despite the impressive earnings beats, revenue beats have been more challenging, beating estimates by a much slimmer margin of only 5%.
Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) reported last week revenue that fell short of estimates, while guidance was also at the lower end of the range, due to weak smartphone demand and slowing growth in its cryptocurrency mining segment of its business. On the fourth-quarter conference call in January, AMD noted cryptocurrency represented mid-single digits as a percentage of annual revenue, with cryptocurrency being a very dynamic market. Just how much cryptocurrency will factor into the current estimates and what the impact or benefit will be in the results is another variable.
Gross margins will also be a driver of the bottom line and the company was guiding for gross margins of approximately 36%. Improving gross margins have driven earnings growth in recent quarters, and whether or not the company was successful in continuing to increase those margins is another area of risk in the upcoming results.
Trimming Price Targets
Analysts have also been turning negative on AMD, and have been trimming their outlook for the stock price, Since the beginning of February, the average analyst price target on the stock has fallen by over 6% from $14.70 to $13.77.
There are plenty of question marks in AMD's upcoming quarter with a lot of areas for a misstep that may cause the company to have either a massive beat or miss, and that is why options are pricing in an enormous move following results.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.