(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Advanced Micro Devices, Inc. (AMD) will face investor concerns about future growth when it reports fourth quarter results in the coming weeks. The chipmaker's inroads against larger rival Intel Corp. (INTC) in key product lines last year encouraged investors, but AMD disappointed when it missed third quarter revenue estimates in October. Now, slowing global demand for chips has prompted analysts to sharply reduce their expectations for AMD when they report later this month.
The slowdown poses a major challenge for AMD's Taiwanese-born CEO, Dr. Lisa Su. Under her leadership, AMD's shares rose 10-fold to an all-time high last September, but they have fallen by a third since then.
The coming quarter's results may be very mixed. According to data from YCharts, analysts estimate that earnings grew 6% in the fourth quarter, while revenue fell by 2%. Analysts have cut their estimates since October after the chipmaker issued weaker than expected fourth quarter guidance.
The company projected that fourth quarter revenue would be $1.45 billion versus estimates of $1.6 billion. Additionally, AMD forecast gross margin of 41% - a critical metric followed by investors. To drive revenue, the company will lean heavily on the sales of products including its Ryzen desktop chip and its EPYC processors used in servers and other machines. These products are the core of the company’s business. Meanwhile, analysts expect earnings per share to rise 6%.
AMD's third quarter also showed signs of major weakness. Revenue of $1.6 billion was about 3% shy of estimates, caused mainly by lower than expected sales of graphics processing units (GPUs) stemming from a decline in blockchain-related demand. The company noted in the third-quarter conference call that blockchain- related sales made up high-single digits of total revenue in the third quarter of 2017, but then fell to a nearly negligible level last quarter. The enterprise side of the business also saw a 5% revenue decline to $715 million.
One area that may help AMD is laptops. According to an article in Tom’s Hardware, citing DigiTimes, Intel’s supply issues could offer AMD the chance to capture up to 20% of the total laptop market share, up from its current share of up to 15%.
Investors will look closely at gross margins for the fourth quarter. The good news is that AMD's margins have been steadily increasing since the fourth quarter of 2016, rising from roughly 32% to 40% in the last quarter.
Investors Appear To Be Cautious
The options market is pricing in a massive amount of volatility for the stock following the quarterly results. The options set to expire on February 15 imply that the stock rises or falls 17.5% from the $20 strike price. It would place the stock in a trading range of $16.50 and $23.50 by expiration. Implied volatility is exceptionally high at 74% and is nearly five times higher than the S&P 500’s implied volatility of 15%.
Options traders appear to be uncertain when picking a direction for the shares. The betting is even at the $20 strike price, with the number of puts at 11,500 open contracts to 12,800 open call contracts.
The technical chart shows that the stock has been in a trading range since October. That range sets up a technical support level at a price of around $16.50 and a technical resistance level at approximately $23. The chart also shows that the relative strength index is beginning to rise, and that may suggest that bullish momentum is returning to the stock.
A Look Ahead
The neutral stance of the technical charts, options bets, and high levels of volatility all suggests that there is a great deal of uncertainty around AMD’s upcoming results. Perhaps that is because investors were blindsided by last quarter's weak results and guidance, and also because of the industry's bearish outlook.
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. 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.