What happened

Shares of Advanced Micro Devices (NASDAQ:AMD) slumped 15.9% in May, according to data provided by S&P Global Market Intelligence. The major decline came at the beginning of the month, driven by AMD's first-quarter earnings report. While AMD's results were in line with expectations, its guidance was disappointing given the bevy of recent and upcoming product launches.

So what

AMD reported Q1 revenue of $984 million, up 18% year over year, and a non-GAAP net loss of $0.04, up from a loss of $0.12 during the prior-year period. The computing and graphics segment produced a 29% year-over-year revenue increase, driven by the company's mainstream Polaris graphics cards and initial revenue from the launch of its Ryzen CPUs.

An AMD Ryzen chip.

Image source: AMD.

With Q2 set to include a full quarter of Polaris sales, a full quarter of high-end Ryzen 7 sales, and nearly a full quarter of mainstream Ryzen 5 sales, as well as potentially some contribution from the launch of AMD's high-end Vega GPU and EPYC server chips, investors were no doubt expecting some impressive guidance.

But AMD failed to deliver that. The company guided for just 12% year-over-year revenue growth for Q2 and low double-digit revenue growth for the full year. Non-GAAP gross margin is expected to be 33% during the  quarter, lower than the 34% reported for Q1. Considering that the company is debuting a full slate of new products this year, this forecast simply wasn't enough to prevent the stock from tumbling.

Now what

Shares of AMD have partially recovered in June, although it's been a roller coaster ride. News that demand from cryptocurrency miners had created shortages of AMD graphics cards drove up the stock, but a broad sell-off in tech stocks pushed it back down.

AMD's long-term target is to produce non-GAAP EPS of at least $0.75 by 2020. The stock currently trades for nearly 16 times this number, which leaves very little room for error. Paying 16 times what a company hopes to earn three years from now, starting from being not profitable at all, is quite a leap of faith. Any indication that AMD will fall short of that goal could send the stock slumping.

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