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

Advanced Micro Devices (NYSE: 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.

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  • Report this Comment On January 16, 2014, at 9:43 PM, bluesky64 wrote:

    Anders,

    Checkout the Latest update

    AMD Video Game Hardware Surged to Highest In Three Years (Bloomberg Bweek)

    Jan 17, 2014: U.S. spending on video-game hardware surged to its highest in three years in December, as consumers snapped up new (AMD based) consoles from Microsoft Corp. (MSFT:US) and Sony Corp. (6758).

    Hardware sales increased 28 percent to $1.37 billion from a year earlier, Port Washington, New York-based NPD Group Inc. said yesterday in an e-mail. The tally, the highest since spending hit $1.84 billion in December 2010, drove total retail sales for the industry to their fifth straight monthly gain.

    Just released on evening of Jan 16 early morning Jan 17, 2014 from Bloomberg Businessweek.

  • Report this Comment On January 16, 2014, at 9:46 PM, bluesky64 wrote:

    Anders,

    More updates

    Japan Vid Gamers Poll - Over 85% Plan Buying AMD Based PS4

    Jan 17, 2014: One of the biggest and influential vid gaming countries in the world, Japan, had video gamers polled about AMD based Sony PS4 and over 85% plan to either buy immediately or some time after initial release.

    Reported by Kotaku

  • Report this Comment On January 16, 2014, at 10:12 PM, KenLuskin wrote:

    Classic BS from the FOOLS.. write a BS story with NO conclusion...

    And then PUMP what MOTLEY FOOL already owns!

    Talk about FRONT RUNNING and CRIMINAL ACTIVITY!!!

    SEC is NOW investigating...

    How does the FOOL in chief look in an orange jump suit?

  • Report this Comment On January 16, 2014, at 10:19 PM, KenLuskin wrote:

    Go to SCRID to READ:

    AMD EARNINGS ESTIMATES for Q4 2013

    Then you will KNOW!!!

  • Report this Comment On January 16, 2014, at 10:27 PM, Uconfan wrote:

    I see limited downside to AMD. They have a price to sales ratio of 0.6 and intel has a ratio of 2.4. Earnings will increase with the 7 million Xbox and Sony sales, and bit coin miners have bought all the graphic chips (try to buy one, they are all sold out). Also they got the apple deal. A comparison can be made to Rite Aide as they similarly had a dirt cheap Price to sales ratio, had more debt Thames AMD, had a similar high short interest, lagged stronger competitors (Cvs and Wallgreen). They exploded when positive earnings took bankruptcy off the table. I see the B card off the table next week. No one has mentioned if the Kamari chip is good at mining, as well. I believe the shorts may have a real bad week next week.

  • Report this Comment On January 16, 2014, at 10:30 PM, guluj wrote:

    800 million to a billion of revenue on games consoles during the holiday season sales is my estimate too. Even though some of this revenue is realized in the previous quarter, AMD is realizing next quarters shipments this quarter. So it probably averages out. Since both PS4 and XBOX One are out of stock in most store mid holiday season, I would expect AMD to have shipped many more parts this quarter for further building of the boxes.

    Besides this, there were significantly higher number of shipments of the Graphics cards due to bitcoin boom and Graphics refresh. AMD's graphics cards were also out of stock this season.

    Mac Pro shipments must also have added significant revenue to AMD and these were high margin cards.

    AMD sold all it could sell of the new Hawaii chips this quarter and do not see any signs of this stopping in the near future.

    I think it would beet its estimate of +5% from the previous quarter very easily. Living room PC boom and graphics refresh would play in AMD's favor in the coming quarters. AMD would gain market share in graphics market with Mantle and Kaveri.

  • Report this Comment On January 17, 2014, at 4:06 AM, rav55 wrote:

    @Anders

    AMD sold 7.2 million console APU in 7 weeks. That is about a 40-50% gain in gross revenue from console sales alone.. That more than offsets lowered pc expectation and it does not take into consideration that Radeon R series discrete GPU's damn near sold out this holiday season. AMD was the grinch that stole nVidia's Christmas. That and the serendipitous discovery that Radeon gpu's are superb at mining cryptocurrencies.

    But like the rest of the street I will be waiting for next Tuesday to see if AMD can beat Intel by at least meeting expectations if not exceeding them.

    AMD gross revenues are about 2x it's market cap. This has "growth stock" written all over it.

    By contrast Intel's gross revenues are about 40% of it's market cap. That is barely a value stock. Intel is grossly overvalued. And the market told us that last night when Intel tanked 4.7% after hours. The pain is not over for Intel and it's just beginning for nVidia.

  • Report this Comment On January 17, 2014, at 11:53 AM, bluesky64 wrote:

    Ander,

    I did not see your thoughts on earning so I will share with you. the streets thoughts.TOTALS:

    Computing Solutions: Sales of $880 million with $27 million of NET profits

    Graphics and Visual Solutions: ADDITIONAL sales of $308 million

    with $ 66 million ADDITIONAL profits= $ 980 million of sales with $ 145 million of NET profits

    ESTIMATED Q4 SALES: $1.83 Billion ESTIMATED Q4 NET INCOME: $ 119 million NET INCOME PER SHARE: $ .155

    Please update your article after earnings Thanks

  • Report this Comment On January 17, 2014, at 12:17 PM, crazyinvestor62 wrote:

    The article states: "(the) PC market (is) where AMD traditionally makes the bulk of its revenue."

    I'd say used to be true...but not anymore.

    AMD has been moving farther away from this for two years to where PC revenue will be about 1/4 of their overall revenue in 2014.

    I am not sure why many people are missing this point. All other categories are growing. While $800M top line sales for games is stated as a drop in the bucket, its up from $0 just a few quarters ago. If this was a startup, going from $0 to $800M would be on fire.

    I suspect the market will eventually realize that AMD is indeed "on fire" and not beholden to the PC business any longer.

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