Can Advanced Micro Devices Recover From This Slump?

Following a recent downgrade from Pacific Crest, shares of Advanced Micro Devices (NYSE: AMD  ) are down nearly 4% in Monday's trading session. This follows last Friday's nearly 6% slump on what seemed to be no news at the time. With this drop, AMD's shares have erased most of their yearly gains and are now up only 2.2% year to date, trailing the S&P 500, which is up 6.08% in that time. Can the company still deliver long-term gains despite this apparent setback?

Getting past the GPU situation
Right now, the key factor weighing on both AMD's and peer NVIDIA's (NASDAQ: NVDA  ) shares is the alleged weakness in the GPU market first reported by Digitimes and accentuated by today's downgrades. 

According to the downgrade, Pacific Crest cites channel checks that suggest low GPU motherboard production levels and echo Digitimes' recent report that graphics card shipments slumped significantly in the current quarter. 

From an investor's point of view, the key to watch for when it comes to both AMD and NVIDIA (though NVIDIA's shares are still outperforming the S&P 500 and the Nasdaq following its own slide) will be how this alleged GPU "correction" ultimately plays out in the financials when both companies report quarterly earnings in July and August, respectively.

What should AMD investors do?
From a long-term perspective, the discrete GPU market is one of AMD's most important businesses, particularly as AMD's products are still quite competitive there, and the IP developed for this business is very widely leveraged in semi-custom and even in PC processors.

With that in mind, there are two parts to the AMD discrete GPU story:

  1. Can AMD gain share? At various conferences, AMD's management has been quite bullish about gaining GPU share in both consumer and professional. If the company is able to do so, then this could partially offset any broad market weakness.
  2. Is the market really weak, or just waiting for new GPUs? Even if there is demand weakness for current parts, it may simply be the case that gamers are waiting for next-generation architectures. The current high-end designs from both AMD and NVIDIA are still fundamentally based on 2+ year old architectures, so a refresh in those products later this year could rekindle demand.

Now, it is difficult to tell whether AMD will gain share in GPUs, and it is even more difficult to know whether this demand lull is real -- and what is really driving it (there are multiple explanations; a popular one is that with custom ASICs for Bitcoin miners becoming popular, GPU demand is waning).

That said, a long-term bet on AMD is a bet at least partially on both the long-term health and competitiveness of AMD's GPU business. 

Foolish bottom line
AMD's volatility may be gut-wrenching, but it typically comes with the highly shorted, small-cap tech stock territory. Until the quarterly results are in, investors have no way of knowing what the "real" story is. However, if you are a long-term investor in AMD, the things that matter are the long-term trends. Is the discrete GPU market set to grow? Is AMD's share set to be stable to up? Can AMD win more lucrative semi-custom contracts?

The answers to all of these questions should ultimately factor into your long-term position, and a single news item or even quarterly report shouldn't be enough to sway your decision either way. 

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Read/Post Comments (6) | 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 24, 2014, at 2:54 PM, masterwallstreet wrote:

    In my opinion only, all the articles I ever read from you this has got to be your best. In my opinion there is no way to predict what direction this will go. With all my research and all the data that I reviewed a lot of this data is available on AMD's website and all the products and benchmarks and on Youtube videos you could review a lot of data and presentations and products. AMD has been recognized as having the best video card in the world for military, medical, gaming, professional and other uses. In about 3 weeks when earnings makes its debut that is when all hell will break loose. If we have a surprise earnings that beat estimates and over 100 million shares of shorting this stock will have to cover. If they forecast better earnings for the following quarter. This will be a great payday. What are the possibilities of this getting bought out before earnings. There are a lot of rumors about this I do not know how true they are or not. This stock is so undervalued and underpriced that it is ridiculous. AMD has a superb product at a superb price. It is a great article. You have more to win by going long than going short. You especially will have a lot to lose if you short this stock in my opinion.

  • Report this Comment On June 24, 2014, at 4:27 PM, rav55 wrote:

    I can't see too many Titan Z cards being sold! However Apple Mac Pro sales have only just matched demand. Any short fall in the AIB channel is likely matched by the share that Mac Pro is giving AMD.

    The channel overstock is also likely the R9280 and below as these were the cards that were in demand for crypto-currency mining. Likely the price will be cut in time for Christmas like they were last year so disastrously for nVidia.

    The retailers also benefited from price gouging last year and now they want a price drop?

  • Report this Comment On June 25, 2014, at 5:41 AM, rav55 wrote:

    It also appeasr that the Verizon Cloud deal may be benefiting AMD this quarter as well.

    "Feldman did not disclose the financial details of the partnership with Verizon, but said it was a “monster deal.”

    The Verizon Cloud Compute and Verizon Cloud Storage Services, which will be in beta before the end of the year, are expected to be in production in early 2014."

    Production and delivery means revenue.

    Also this piece indicated that Verizon would likely become a reseller of AMD SeaMicor servers.

    "Incidentally, both AMD and Verizon can envision a scenario whereby Verizon peddles clones of its cloud hardware to enterprises for their own internal private clouds, linking them directly to the public cloud run by Verizon using its own networks. There is no word from either on when this might happen. But the funny bit is that Verizon could end up being a big server reseller for AMD."

    http://www.enterprisetech.com/2013/10/07/verizons-new-cloud-...

  • Report this Comment On June 25, 2014, at 1:11 PM, pemoj wrote:

    Ashraf! My beloved little bro! How I missed you! Please bro, keep writing articles in Seeking Alpha about Medical Marijuana! I love when you write about that company! Please bro, come back SA, we need your Medical Marijuana´s articles! Thanks bro!

  • Report this Comment On June 26, 2014, at 2:37 AM, rav55 wrote:

    @pemoj

    I think Ashraf's been smoking too much medical Mary Jane!

  • Report this Comment On June 26, 2014, at 2:45 AM, rav55 wrote:

    @Ashraf

    Here's an interesting little factoid.

    It appears that Mantle is getting some very serious scrutiny form Intel. So much so they are pressuring AMD to give them the source code to "experiment" with.

    Between nVidia Gameworks and AMD's Mantle, DX12 doesn't look so good for the great monopolist.

    Why would they need the source code unless they are trying to optimise hardware and maybe encroach on AMD GCN patents. Or maybe license some AMD hardware? That's not likely though unless it was a very big offer. Or maybe they plan on cutting nVidia loose?

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