Shares of AMD (AMD 4.09%) dropped 11% after hours on May 1 after the chipmaker posted first quarter numbers which merely met analyst expectations. Revenue rose 18% annually to $984 million, and non-GAAP net loss narrowed from $0.12 a year ago to $0.04 per share.
Those were solid numbers, but merely matching estimates didn't seem enough to justify a further rally for the stock, which already rallied about 280% over the past 12 months. But does AMD's post-earnings dip represent a buying opportunity for investors who had been waiting for a pullback? Let's examine AMD's key growth opportunities to find out.
All eyes on Ryzen
AMD's most exciting new product line is Ryzen, a new series of x86 chips which are squarely aimed at Intel's (INTC 3.61%) current-gen Kaby Lake processors. AMD's initial benchmarks show that AMD's top-tier Ryzen 7 1800X matches the 8-core Intel Core i7-6900K in single-threaded performance, and beats it by 9% in multi-threaded performance -- for just half the price.
Since recent reports from top PC makers indicate that PC sales are finally warming up after a multi-year slump, AMD's launch of the Ryzen in early March could coincide with a lot of desktop upgrades. This could give AMD a huge advantage over Intel over the next few months, since Intel's comparable Coffee Lake and next-gen Cannonlake chips aren't expected to arrive until the end of the year. AMD even plans to challenge Intel in the data center market with Naples, a high-end Zen processor which has more cores and memory channels than Intel's comparable Purley CPU.
Great annual growth, weak sequential growth
AMD's first quarter included less than a month of Ryzen sales, but CEO Lisa Su noted that those initial numbers contributed to the Computing and Graphics segment's 29% year-over-year sales growth to $593 million.
That business was also boosted by robust sales of its new Radeon desktop GPUs, which are intended to counter NVIDIA's (NVDA 3.88%) new lineup of GeForce cards.
AMD's market share of the add-in board market rose from 21.6% to 29.5% between the fourth quarters of 2015 and 2016, according to JPR. During that period, NVIDIA's share dropped from 78.3% to 70.5%.
However, weaker sales of mobile CPUs and GPUs caused AMD's Computing and Graphics revenue to dip 1% sequentially. On the bright side, AMD's client average selling price (ASP) rose both sequentially and annually, fueled by higher ASPs for its newer desktop processors and GPUs. That price growth, along with lower expenses, narrowed the unit's operating loss from $70 million a year ago to $15 million.
AMD's Enterprise, Embedded, and Semi-Custom (EESC) revenue rose 5% annually to $391 million, thanks to consistent sales of semi-custom SoCs for gaming consoles. Sales still dropped 23% sequentially due to seasonally lower sales of semi-custom SoCs, but the recent refreshes of the PS4 and Xbox One could help sales rebound later this year. However, the EESC unit's operating income declined 81% annually to $9 million -- due to higher server related R&D investments being partly offset by licensing revenues from its THATIC joint venture in China.
The upcoming catalysts and wild cards
The next big catalyst for AMD will be its next-gen GPU Vega, which will launch this quarter in an attempt to pull ahead of NVIDIA's current-gen Pascal cards. NVIDIA is expected to counter Vega with its next-gen Volta chipset next year, but there's a strong chance that the Vega can win over upgrading desktop users before Volta arrives.
However, AMD also faces two wild cards which could help or harm its business. First, persistent rumors indicate that Intel could sign a graphics licensing deal with AMD, since its previous deal with NVIDIA recently expired. If Intel agrees to pay AMD an amount comparable to the $66 million in licensing revenues it paid NVIDIA every quarter, it could give AMD's top line a nice long-term boost.
Meanwhile, NVIDIA recently reentered the gaming console market by supplying its Tegra SoC for Nintendo's (NTDOY 0.46%) new Switch console. This unexpected development indicates that AMD's long-term dominance of the console market might not be guaranteed.
Is it time to buy the dip?
AMD expects its second quarter revenue to rise 12% annually and about 17% sequentially at the midpoint, as sales of Ryzen and Vega chips take off. By the end of the year, higher console sales during the holiday season could significantly lift its EESC revenues.
Wall Street expects these catalysts to boost AMD's revenue by 11% this year and 10% next year. AMD's price-to-sales ratio of 2.6 is still lower than its industry average of 3.9, so the stock still doesn't look overpriced after its year-long rally. AMD is expected to return to non-GAAP profitability with earnings of $0.08 per share this year and $0.30 per share next year.
Based on these facts, investors who believe that Ryzen and Vega can respectively counter competition from Intel and NVIDIA should view the pullback as a buying opportunity -- as long as they realize that their success still remains highly speculative.