Earnings Scorecard: Advanced Micro Devices 2017Q3

• Advanced Micro Devices beat on both top and bottom-line numbers.
• The company reported great numbers overall and the turnaround strategy seems to be going well.
• Although management raised full-year they did note that Q4 revenue would fall sequentially.

The semiconductor space is one of the hottest if not the hottest sectors of the stock market. As the world becomes connected more with the internet semiconductors are the new “industrial” companies. Everything we own from our phones to cars will have a chip and be connected to the internet in the future. The ETF that tracks the semiconductor sector (SMH) is up 23% over the last 6 months (vs. the S&P500 up 7.25%). Although the sector has been enjoying the gains, Advanced Micro Devices (AMD) has been volatile and stuck in a trading range between $11-$15.

One of the main reasons why the stock is so volatile is because of bitcoin. A small part of AMD’s business provides the chips that are involved in bitcoin mining so traders use AMD’s stock as a proxy for the cryptocurrency. However, AMD has been on the comeback under the great leadership of Lisa Su who has reshaped the company. The company reported an earnings beat when its management reported 2017 Q3 earnings. The company reported earnings of $0.10 versus expectations of $0.08 and revenue of $1.64 billion versus expectations of $1.57 billion.

The company reported revenue growth of 26% which was mainly driven by the graphics and computing segment which brought in $819 million (74% YoY growth). However, the Enterprise segment reported flat year-over-year revenue growth with $821 million. This is an area of concern because it seems like AMD is back to losing business to Intel and other competitors in this space. Besides that spot of weakness, the other numbers for the business seem to be great. The gross margins actually expanded from 33% to 35% and costs seem to be under control. The R&D spending seems to be expanding as well which is positive for the company. The cash balance is healthy at $879 million up from $844 million a year ago.

Management raised full-year revenue growth guidance to go up from the high teens to 20%. However, the management noted that Q4 revenue growth was going to be in the range of 12 to 18% sequentially. This is because management is coming with tough comparisons on a quarter to quarter basis on the revenue side. Management might also be bringing down numbers and reducing expectations from investors. Given that note and the weak Enterprise segment numbers, the stock has not reacted kindly to the news(tanked 13% yesterday). A lot of momentum investors were piled into this name going into earnings. The company also got a sell rating with a $5 price target from Citi last week ahead of earnings which were a bit exaggerated by that analyst. Given the bad news, a violent move in a stock like this is common.

If the stock goes below $11.50, I am a buyer because if you really cancel the noise around the news and look at what the company is doing they are doing great. The company will gain from the rise of e-sports with its graphic chips and also has partnerships on the enterprise side with the company recently announced partnerships with the likes of Tencent, Alibaba, Baidu, and even Amazon Web Services.

Grade: B-

Estimates: Earnings- $0.09/share; Revenue- $1.54 billion (Ranking-114/504 on Estimize).

Disclosure: Cresco Investments has a long position in Advanced Micro Devices (Stock Ticker: AMD).

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor.