AMD Has a Catalyst Coming Up -- But in Which Direction?

AMD's run-up since October sets the stock up for high drama next week. This fourth-quarter report is a catalyst all right, but will the stock shoot up -- or down?

Jan 16, 2014 at 9:00PM

Advanced Micro Devices (NASDAQ:AMD) reports fourth-quarter results next Tuesday. The stock has raced 35% higher from its 3-month lows, setting the stage for some high-stakes drama.AMD Chart

AMD data by YCharts

If AMD delivers on the promises that pushed the stock higher recently, AMD investors can pocket a nice gain next week. If not, AMD shares are likely to tumble in a big way. That's just how momentum stocks roll when earnings time comes along, and you have to be prepared for a big move either way. The stock will most likely sink or soar, with virtually no middle ground. A muted market response is the last thing I'd expect from AMD investors.

Will the plucky chip designer make good on this run-up? Let's have a look.

There's no doubt that AMD is selling plenty of semi-custom chips into the video game console market. All three of the current-generation consoles use AMD's graphics technologies; Microsoft 's (NASDAQ:MSFT) Xbox One and the Sony (NYSE:SNE) PlayStation 4 even tapped AMD to supply their core CPU chips. So there's a floor to AMD's possible results. The shares aren't likely to plunge into penny stock territory overnight.

On the other hand, we're not talking about huge volumes. Microsoft reported 3 million Xbox One systems sold over the holidays and Sony moved 4 million units. Respectable numbers, but a drop in the ocean next to the (still) vastly larger PC market where AMD traditionally makes the bulk of its revenue.

IHS iSuppli estimates that AMD bills Microsoft and Sony about $110 per console chip, so we're looking at no more than about $800 million in top-line sales -- and the consoles weren't all built in the fourth calendar quarter, so the direct revenue impact is even smaller.

Analysts expect AMD to grow sales by 33% year over year, landing just above $1.5 billion. That's in line with AMD's own guidance. The semi-custom chips found at the heart of those game consoles will help AMD drive gross margins higher. CEO Rory Read expects the PC market to continue shrinking in the fourth quarter and well into 2014.

So the big question is, can AMD's console business outweigh the pressure from the weak PC sector? As a corollary to that query, AMD hopes to win other semi-custom contracts based on how they met Sony's and Microsoft's special needs -- and this earnings call would be the first place to look for that effort gaining traction.

I don't have the answers to these questions, but I can't wait to find out. Those semi-custom chips could be exactly the lifesaver that AMD needs, but I haven't seen much evidence that the strategy is actually working so far. In the meantime, I'm staying on AMD's sidelines.

AMD might be good -- who really knows? -- but here's a great stock for 2014
There's a huge difference between a good stock, and a stock that can make you rich. AMD's turnaround story could qualify someday, but AMD stock is still too risky to be a great investment. So what should growth-hungry investors do? The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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