Will Advanced Micro Devices Surprise This Quarter?

Shares of Advanced Micro Devices (NYSE: AMD  ) are typically extremely volatile and are quite sensitive to news flow. This volatility stems, at least in part, from its being a very "polarizing" stock with a pretty sizable short interest. On one hand, bulls cheer the large new opportunities afforded to the company in the form of ARM Holdings (NASDAQ: ARMH  ) servers, semi-custom, and embedded. On the other, bears expect continued market-share loss in its core PC market to more than offset any potential growth in the "new" areas.

While the intra-quarter volatility is interesting to traders, long-term investors are more interested in the trajectory of the business. With that in mind, let's look at what investors should be on the lookout this quarter, and what areas could potentially be sources of upside surprise.

Rewinding back to guidance
At AMD's most recent earnings report, management guided for revenue to increase 3% from Q1 levels, give or take 3%, which actually beat sell-side consensus at the time. Additionally, the company guided to gross margins of 35%. For the full year, AMD set the following expectations:

  • Revenue growth year over year from 2013 levels.
  • Free cash flow positive for the year.
  • Cash balance to be maintained near the company's "optimal balance" of $1 billion, and above the target minimum of $600 million.

From that, the sell side went ahead and set the "benchmark" for the year, with consensus for the year coming in as follows:

  • Full year revenue estimate of $5.97 billion, up 12.6% from the previous year.
  • Full year non-GAAP earnings per share of $0.19.

However, more importantly, the sell side is expecting $1.43 billion in sales ($0.02 per share in earnings) for the June quarter and $1.56 billion in sales ($0.07 per share in earnings) for the September quarter. In particular, the guide for the September quarter will be the one to watch, as the market doesn't seem to be expecting anything too off from consensus for the current quarter.

Does AMD do better than expected in PCs?
Following PC chip rival Intel's (NASDAQ: INTC  ) positive pre-announcement, some investors believe that AMD may beat for the current quarter and/or guide up. Given that AMD's shares didn't really react positively to Intel's announcement, the market may not think Intel's performance will reflect AMD's.

There's good reason to think that, particularly as Intel's beat was driven by strength in business PCs, a segment where Intel has the lion's share of the market. Keep in mind, though, that AMD's exposure here is non-zero, and if AMD was able to keep market segment share here flat, then secular growth would imply a bump for AMD as well. The double-edged sword, of course, is that if Intel's surprise was driven in part by share gains, then the picture looks unfavorable to AMD. 

Is the alleged graphics-card weakness set to take a toll on the company's results?
According to Digitimes, shipments of graphics add-in boards for PCs is set to drop 30%-40% this quarter as a result of unhealthy inventory levels. Further, according to the report, both AMD and graphics-rival NVIDIA (NASDAQ: NVDA  ) would rather reduce shipments and keep average selling prices up than cut prices to catalyze sales.

Note that according to the Digitimes report, the graphics card vendors have been aware of this inventory problem since April. Since AMD issued its guidance in April, and since AMD is known to negatively pre-announce when management expects a material miss, it's unlikely that AMD will see such a miss this quarter as a result of this alleged graphics inventory glut.

However, if this issue is real, then it may not affect GPU shipments for the current quarter but could adversely affect shipments in the coming quarter for both AMD and NVIDIA.

Foolish bottom line
If AMD is able to beat this quarter's estimate and issue a better-than-expected guide for the September quarter, then you can probably expect the shares to head toward $5 a share. However, since this stock is highly volatile (and shorted), any miss in the current quarter and/or guide could drive the shares dramatically lower.

With all of that in mind, the long-term picture is dependent on AMD's ability to stabilize and grow PC processor share, grow graphics share, and expand into new markets. It's not inconceivable that AMD's shares could trade meaningfully higher from here on strong execution, but at the same time the competitive dynamics and secular trends aren't particularly favorable.

But it's that uncertainty that makes AMD, at the very least, an interesting company to follow. 

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Read/Post Comments (12) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 22, 2014, at 7:44 PM, rav55 wrote:

    You spent a fair amount of needless analysis rehashing what everyone already knows.

    If AMD does not pre-announce any earnings warning then we can expect AMD to at least mildly surprise or report earnings that are in alignment with last quarters expectation.

    I suspect that earnings will surprise due to the unexpected high demand from consoles. I think that there will be an uptick in the custom sales unit as there have been reports that PS4 inventories are failing to match demand.

    We are now well inside the oem supply channel timeline for late fall and Christmas sales. Neither Sony nor Microsoft want to lose any possible revenue due to empty shelves

    Also Mr. Read and AMD is presently the object of a class action lawsuit that claims his outlook regarding Llano was rosier than was the case. Of course nobody saw the tablet market tearing out huge chunks of the PC markets either. But you can not ignore the fact that Mr. Read is likely sensitive to very accurate and timely forward looking statements.

    Those statements if they are made will likely be conservative.

    Given that reasoning and if there is no pre-announcement then that should be taken as very good news. If nothing is announced before early next week then AMD is heading for another good quarter.

    He may not pre-announce even a good quarter just to screw the shorts! Short interest has declined substantially but a very good squeeze is still well primed.

  • Report this Comment On June 22, 2014, at 7:48 PM, masterwallstreet wrote:

    In my opinion only, I think AMD will definitely surprise us this quarter. That is why they are trying to manipulate this stock before earnings come out because of BS articles and wannabe writers. Friday there was no news at all and the stock was trading a huge volume over 50 million shares.They target stop losses, they wiped out the call contracts that were in the money or close to it. There was no news on Friday. The article according to Digitimes was written on Monday June 16. That was all old news and a BS article. The article actually targets NVIDIA. Right now the company is in a quiet period because of earnings. They will try to manipulate this stock with BS articles, bogus claims and bogus opinions. I am hoping that the AMD CEO files a complaint with the SEC and asks for an investigation into the manipulation of this stock and that they are destroying the true value of the company. I am asking for investors who have shares in this company to file a complaint with the SEC and ask them to investigate manipulation. There must be a few broken laws. How could you possibly short over 100 million shares and not cover? You just can not keep shorting to try to bring it down and release stop orders and write bogus articles to try to manipulate AMD stock. When earnings comes out then we will really find out.

  • Report this Comment On June 22, 2014, at 8:16 PM, ta152h wrote:

    Another potential catalyst for a huge uptick would be another semi-custom deal, or another win over Intel like the Verizon deal.

    I think the former is more likely, since it was said that one or two more would be announced this year. If they come to fruition, it will not only mean more revenue, but also give more credibility to this new path.

    Another possibility is Jaguar gaining some traction since they have finally created a desktop platform for it, and it's an attractive product. It won't be huge, but even marginal sales there will be significant over essentially none.

    I don't see any chance of Kaveri do anything significantly positive Intel overall, but it will do well in anything that leverages HSA. Even so, that's minute, and if it holds market share, that's about as high as someone reasonable can expect. I'm still not convinced the more powerful GPU really resonates with many customers.

  • Report this Comment On June 22, 2014, at 10:27 PM, rav55 wrote:

    @masterwallstreet

    " I am hoping that the AMD CEO files a complaint with the SEC and asks for an investigation into the manipulation of this stock and that they are destroying the true value of the company. "

    Interesting.

    I think that there a few writers, who are of course well known, whose body of work when taken as a whole could be construed as crossing a line to actually trying to cause harm. Libel is a very fine line. A single piece may not cross this line but a compendium of work could.

  • Report this Comment On June 23, 2014, at 10:27 AM, Beerfloat wrote:

    This talk about manipulation and liability isn't gonna hold up. And if you're seriously concerned about misinformation you should cast a critical eye on the weekly load of infomercials trying to pump this stock by techies who happen to have a crush on AMD.

    If you don't know by now that INTC is an investment and AMD is a swing trade, and use it accordingly, you only have yourself to blame. Didn't sell when it was over 4.30? Clench your teeth and wait for the next cycle.

  • Report this Comment On June 23, 2014, at 9:56 PM, rav55 wrote:

    You can not walk into a crowded theatre and yell "FIRE, FIRE", without facing the consequences when there is no fire.

  • Report this Comment On June 24, 2014, at 3:41 AM, CHADBOGA wrote:

    rav55,

    You must be a simpleton if you think articles discussing a companies future share price performance can be compared to shouting "Fire" in a crowded theatre.

    You just need to accept that AMD is going to go belly up, stop all your crying over this and stop making such a fool of yourself.

  • Report this Comment On June 24, 2014, at 9:27 AM, chrispycrunch wrote:

    Put buyers failed to pull AMD below $4 on 23/06/2014. Look for restructuring efforts to support profitability efforts.

    LONG AMD to $8

  • Report this Comment On June 24, 2014, at 2:21 PM, mycardbrokedown wrote:

    @CHADBOGA - oh that tune is so old it's not even funny any more. If till 2013 you could claim uncertainty... if before that you could claim bad products and predatory market tactics from intel... now you're just left with: a) stupidity b) lack of education or c) malintent

    @Ashraf one of the more balanced yet superfluous writeups in ages.

    The reaction of the market to the downgrading of NVIDIA and AMD had a much bigger impact on AMD even though just 30-35% of revenue is graphics + custom... out of that just graphics is hit... so the effect on AMD should have been close to nill since AMD is not just a dGPU builder not even by far I think AMD ships more iGPUs then dGPUs anyway so those market moves can be attributed to loads of speculation.

    Guys like CHADBOGA person here just paint a picture as to how these guys think and act and why they can be so readily and easily be manipulated... You say rav55 is a simpleton by making a mockery of yourself. Well yeah... See Ashraf for exactly these guys the kind of negative articles of old you and others wrote this is an incentive to dump the stock or short it.

    BeerFloat if infomercials that pump AMD (which are much fewer then for Intel or NVIDIA btw) are just to counter something that can only be described as propaganda because it certainly passed marketing a long time ago. I for one sustain AMD openly mostly because without it I and everybody else would pay a factor more for a factor less. And between Intel and AMD Intel is the one that has more issues with bribes, market manipulation, monopolist behavior, backroom deals etc and has been fined already close to 3BN$. And just because most of the readers online are totally uneducated as well as most brokers in regards to technology I would just suggest you read up this pices:

    http://www.agner.org/optimize/blog/read.php?i=49

    For all this Intel has paid >1BN$ to AMD and has to keep up this shamefull note:

    https://software.intel.com/en-us/articles/optimization-notic...

    Also now the next >1BN$ fine comes from europe:

    http://www.reuters.com/article/2014/06/12/us-intel-court-eu-...

    And here Intels hall of shame:

    http://www.networkworld.com/article/2239461/data-center/inte...

    Now excuse me if I sustain this company's competitor. Even if AMD is no saint Intels track record is just insane. And the harm Intel has made to consumer is just enormous I think that not even a 100BN$ fine would make the wrong it has done right again.

  • Report this Comment On June 25, 2014, at 10:33 AM, rav55 wrote:

    @Chad...

    You have posted 2 other times in the year or so you have been a member. And why did you bother to post anyway? Your 2 previous posts weren’t exactly pointed pieces of penetrating analysis either.

    I think that I know the answer to that. You are like the child waving his hand blurting out, I know, I know, so excited that he is wetting his pants.

    When he finally gets to spew out an answer; it's just so wrong at so many levels. Where to begin...

    Please allow me to elucidate what you are incapable of perceiving. I mentioned a body of work when taken as a whole steps over the line. And using “yelling fire" as metaphor is quite apropos.

    Of course you need to get past the 5th grade to understand. Next time before you decide to spew take the time to at least TRY to understand what was written. Of course if you taken the time to even read, some of the “writing” I was talking about then perhaps you may not have even bothered to post.

    Of course it does take time to read when you have to move your lips. I can understand your impatience to at least be recognised regardless of your rather innept and immature equity analysis.

    Thank-you for playing. Don't go away mad okay? Just go away,at least until you have something cogent to offer. Or until you manage to make it into the 6th grade, whatever comes first.

  • Report this Comment On June 25, 2014, at 11:52 AM, CHADBOGA wrote:

    ravi55,

    What will happen first?

    AMD going belly up or you being admitted to the Bar and be recognised as one of the finest Legal Minds to ever come out of the Gay Community?

  • Report this Comment On July 11, 2014, at 9:26 PM, rav55 wrote:

    @CHADBOGA

    Your post on TMF is forever immortalized as a homophobic rant! You have such a rapier and penetrating wit.

    Is that the best you can do? Seriously?

    When confronted you resort to calling someone gay? Why not call me Jewish or use the “N” against me. Or any other racial or social slur? Why not just call me fat or I have a big nose!

    A bigot is a bigot and now we know just what you are. You can call me anything that you want. At least I am not a bigot.

    I was trying to insult you when I accused you of acting like you were in the 6th grade.

    I really didn’t expect you to confirm it. Grow up.

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