Advanced Micro Devices (AMD +18.37%) is coming off an extremely disappointing 2017. Shares of the graphics chip and processor specialist underperformed the market last year despite terrific revenue and earnings growth. Questions about AMD's ability to consistently deliver growth in the face of intense competition from Intel and NVIDIA have weighed on the stock.
AMD has a chance to set things right when it releases its fiscal fourth-quarter results after the market closes on Jan. 30. But will investors like what they see when the report comes out?
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The expectations
AMD's third-quarter report in October last year saw it easily beat Wall Street estimates and raise full-year guidance. A notable highlight of that quarter was AMD's push toward profitability. The company had produced GAAP earnings of $0.07 per share, compared to the massive year-ago loss of $0.50 per share.
A similar trend can be expected this time as AMD projects a 26% year-over-year bump in the revenue to $1.4 billion, which could boost earnings to $0.05 per share. By comparison, the company had reported a loss of $0.01 per share in the prior-year period.
One of the key factors driving AMD's bottom-line growth is the increase in the average selling prices of graphics processing units (GPUs) and central processing units (CPUs). The company had said that it is witnessing significant price lifts on both these fronts so it won't be surprising if AMD can blast past the estimates.
GPU supply is currently tight because of strong demand from cryptocurrency mining, and the trend is expected to continue this year. Taiwanese news daily DigiTimes expects the budget and high-end GPU prices to rise in the range of $5 to $20 in the first quarter of 2018, which could help AMD's second-quarter guidance.
But investors still need to be cautious -- AMD's recent Ryzen CPU price cuts could affect the company's near-term outlook.
What about the outlook?
AMD's terrific outlook had failed to satisfy investors the last time, so it will have to do something special to get on their good side next week -- easier said than done because of AMD's latest move in the CPU space.
AMD recently announced massive price cuts to its Ryzen CPUs across the board. These cuts should help clear the inventory of its current-generation Ryzen chips before the launch of new CPUs based on a new 12-nanometer process. AMD is aggressively sampling its second-generation Ryzen CPU to partners before it hits the market sometime in April this year, promising at least 10% performance gains at a lower power consumption.
More important, AMD is now undercutting Intel's Coffee Lake family of CPUs, which should allow it to maintain its market share momentum against Chipzilla before the new chips go on sale. But it remains to be seen how investors will react to any potential weakness in AMD's short-term guidance as a result of these price cuts.
It won't be surprising if the lower-priced CPUs pressure AMD's margin in the near term, but the weakness should be temporary since the second-generation Ryzen products are on their way.
The GPU market, on the other hand, could continue being a catalyst for AMD given the potential appreciation in pricing because of cryptocurrency demand. Susquehanna Financial Group estimates that cryptocurrency-led GPU revenue hit $500 million in the fourth quarter of 2017. And cryptocurrency miners have reportedly bought $200 million worth of GPUs already this month.
AMD's GPU business could receive a short-term boost and help mitigate any potential weakness in the CPU segment, allowing the company to issue a robust guidance. But whether investors will like the company's results and the accompanying outlook is a mystery. No doubt in the back of investors minds will be the fact that AMD has lost some ground to NVIDIA in the GPU market of late.
AMD needs to deliver more than just a beat-and-raise this time, reassuring investors that it is capable of taking market share from its bigger rivals.
