Ryzen CPU logo

Image source: AMD.

Advanced Micro Devices (NASDAQ:AMD) ended 2016 on a high note. The company beat analyst estimates across the board when it reported its fourth-quarter results, driven mostly by its Polaris graphics cards. The PC CPU market also treated AMD a little better, with client processor sales improving compared to the third quarter.

AMD enters 2017 on the cusp of launching what CEO Lisa Su calls "our strongest set of high-performance computing and graphics products in more than a decade." Ryzen, the company's new CPU, is now confirmed to be launching in early March, while Vega, its upcoming high-end GPU, is set to launch sometime during the second quarter.

AMD is also in a far better financial position thanks to a joint venture deal and the sale of stock and convertible notes last year. The company had $1.26 billion in cash and $1.44 billion of debt at the end of 2016, compared to $785 million in cash and $2.24 billion in debt at the end of 2015. The diluted share count has jumped 17.7%, but that's a small price to pay for a sound balance sheet.

Still losing money

Despite beating estimates, AMD still posted a loss during the fourth quarter on both a GAAP and non-GAAP basis. Revenue jumped 15% year over year, but seasonally low sales of semi-custom products knocked sales down 15% compared to the third quarter. AMD managed a non-GAAP operating profit, but non-GAAP EPS still came in at a loss of $0.01. GAAP EPS was a larger loss of $0.06.

The computing and graphics segment, which includes GPUs and CPUs, produced $600 million of revenue, up 27.7% year over year and up 27.1% sequentially. AMD's Polaris graphics cards seem to be gaining some momentum, as they drove far less impressive growth during the third quarter. The segment posted an operating loss of $21 million, a major improvement over the $99 million loss reported during the fourth quarter of 2015.

The semi-custom segment grew revenue by 3.7% year over year to $506 million. Revenue sank 39% year over year, but this was expected. The third quarter features the buildup of game console inventory for the holiday season, and with the segment still dominated by game console SoCs, there's no way to avoid this seasonality. Segment operating income was $47 million, down 20% year over year despite the higher revenue.

Looking ahead

AMD expects its first-quarter revenue to grow by 18% year over year, representing an 11% sequential decline. The company didn't provide earnings guidance for the quarter, but it did provide a more general outlook for 2017. AMD expects revenue to grow this year, with non-GAAP gross margin improving and non-GAAP net income turning positive. With both Ryzen and Vega launching soon, these goals aren't particularly optimistic.

Whether AMD's bottom line surges enough to justify the buoyant stock price is another matter. AMD's stock soared in 2016, and the company now has a market capitalization of around $10 billion. AMD will likely need to get its operating margin into the double-digits for that price to make much sense, a tall order for a company that has lost money in each of the past five years.

There's still plenty we don't know about Ryzen and Vega. Su talked about Ryzen during the conference call, but there wasn't much new information. The initial launch will be focused on the high end, competing with Intel's i7 and i5 chips, with the lineup eventually filled out with lower-end products. The breadth of the initial launch is still an unknown, as is pricing. Even less is known about Vega.

2017 looks like it will be the year that AMD returns to profitability, at least on a non-GAAP basis. The size of those profits depends on whether Ryzen and Vega live up to expectations. With Ryzen set to launch in a month or so, more details should be coming soon.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.