Please ensure Javascript is enabled for purposes of website accessibility

AMD Crushes Earnings, but Gets Downgraded Immediately: What You Need to Know

By Rich Smith – Jul 26, 2017 at 11:20AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Advanced Micro Devices beat every expectation, but BMO still knocked it down a peg. Why?

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

By all rights, owners of Advanced Micro Devices (AMD -2.12%) stock should be celebrating today. On Tuesday after close of trading, AMD reported an 19% increase in revenue featuring a 51% surge in revenue from its computing and graphics division. Headlines are calling the quarter not just an "earnings beat" but a "blowout," and one in which AMD "gave investors what they wanted," up to and including "upbeat guidance" on top of strong actual results. AMD stock is surging better than 9% in response to the news.

And then BMO Capital downgraded it.

Here's what you need to know.

Semiconductor chip

AMD stock is on fire -- but one analyst wants to put it out. Image source: Getty Images.

1. What AMD said

AMD reported its fiscal Q2 2017 revenue came in at $1.22 billion, which was ahead of estimates. Earnings were either negative $0.02 (GAAP) or positive $0.02 (pro forma), depending on whether you like your earnings news in the form sanctioned by generally accepted accounting principles or management's EBBS (earnings before bad stuff) format.

Analysts, who go the pro forma route, predicted AMD would only break even in Q2 -- so by that standard, the $0.02 in pro forma profits constituted an earnings beat.

2. Impressed but worried

Left and right across Wall Street, most analysts responded positively to AMD's results this morning, with Stifel Nicolaus raising its price target on AMD stock to $13, Mizuho Securities going to $17, and Merrill Lynch to $18. But up at BMO Capital in Canada, they're humming a more cautious tune.

As explained this morning on (requires subscription), BMO called AMD's performance in Q2 "near-flawless." BMO fully expects AMD's new Ryzen and Vega chips to take away market share from rivals like NVIDIA and Intel. Regardless, BMO said it foresaw no "meaningful ensuing earnings" for AMD.

Accordingly, BMO has downgraded AMD stock to market perform and assigned a price target of just $15 to the stock.

3. Is BMO right to worry about AMD?

And yet, to listen to AMD management, things are going great. "[S]econd quarter results demonstrate strong growth driven by leadership products and focused execution," said AMD CEO Dr. Lisa Su. Across the company's product lines, "Ryzen desktop processors, Vega GPUs, and EPYC datacenter products" are all getting "tremendous industry recognition," driving "improved financial performance, including double digit revenue growth and year-over-year gross margin expansion."

Peering into the future, AMD said revenue should grow "approximately 23 percent sequentially, plus or minus 3 percent" in Q3, and "approximately 15 percent year-over-year." This seems to suggest that AMD is looking to book revenue of as much as $1.5 billion this current quarter -- whereas Wall Street is looking for less than $1.4 billion -- making another earnings beat a real possibility. Revenue for the full year should grow by "a mid to high-teens percentage," which is better than the "low double digit percentage" AMD was previously forecasting.

What it means for investors

And yet, while all this sounds good from a revenue standpoint, it's notable that Su chose to focus exclusively on forecasting revenue growth for AMD going forward -- and said not a word about profits. That tends to support BMO's view that actual "earnings" on said revenue may not be "ensuing" at all.

So where does this leave investors?

Judging from the latest tally of AMD's earnings and free cash flow posted by S&P Global Market Intelligence, AMD is still losing money hand over fist. Over the past 12 months, AMD has now racked up GAAP losses of $546 million, and remains on track to record its sixth straight year of losing money. The free cash flow picture is prettier, but only relatively so. Cash burn for the past 12 months is negative $129 million, reversing the trend toward positive free cash flow that we thought might be beginning last year.

Granted, analysts on the whole remain optimistic about AMD's chances of turning profitable -- but not before 2018, and even then, with GAAP profits of only $0.19. Given that AMD stock now trades at a multiple of 81 times those hypothetical next year's earnings, I have to agree that BMO's caution is warranted. At today's prices, AMD stock is simply too expensive to buy.

Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NVDA. The Motley Fool recommends INTC. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.