Advanced Micro Devices (AMD -1.57%) shares have fallen off a cliff over the past month, as investors are probably concerned about whether it can sustain its rally in the face of a fading tailwind and rising competition. The chipmaker has minted a lot of money thanks to cryptocurrency mining, but that catalyst is fizzling out and rival NVIDIA (NVDA 0.68%) has launched a new generation of graphics chips to reclaim its lost market share.
Still, it won't be surprising to see AMD turning investor sentiment in its favor when it releases its fiscal third-quarter results on Oct. 24, as it has a few tricks up its sleeve.
AMD can get a shot in the arm ...
It looks like AMD deliberately kept Wall Street's expectations on the lower side while releasing its fiscal second-quarter results back in July. The company's guidance had called for annual revenue growth of just 7% during the quarter ending in September, a far cry from what investors have gotten used to in recent quarters.
AMD blames weak GPU sales to the cryptocurrency market for this slowdown, but recent developments indicate that it could easily surpass the low-balled guidance. That's because the company is carrying solid sales momentum across different verticals, including GPUs (graphics processing units).
For instance, its share of the GPU market increased to 36.1% during the June quarter from 30.3% in the prior-year period. It is likely that AMD's GPU market share increased during the third quarter as well, because NVIDIA loyalists would have refrained from buying new cards, as the latter was preparing to launch its next-generation chips by September end.
On the other hand, AMD looks all set to make a bigger dent in the market for computer and server CPUs (central processing units) thanks to Intel's (INTC -1.90%) supply constraints. A shortage of Intel CPUs will push PC OEMs (original equipment manufacturers) toward AMD's offerings. Not surprisingly, research firm Fubon believes that HP will use AMD's processors across 30% of its consumer PC lineup, while Dell will be deploying them in more commercial PCs.
AMD is witnessing a similar resurgence in the market for server processors as well. Reports suggest that Intel has been forced to slash prices of its Xeon server processors in response to the rising demand for AMD's EPYC chips. In fact, AMD's server market share reportedly hit 1% for the first time in four years in the second quarter of 2018, and going by Intel's rumored price cuts, it is likely that the market share gains continued in the third quarter as well.
As such, AMD has the potential to trump Wall Street's expectations when its third-quarter results are released. But investors will be closely examining the outlook to see if the company's catalysts are strong enough to lift its growth rates once again.
... but can it sustain the momentum?
AMD has done well to sink its teeth into the GPU market by putting NVIDIA on the back foot, but the latter is all set to make a comeback thanks to its new products. Additionally, AMD has admitted that "lower sales of GPU products in the blockchain market" have started weighing on its business.
These two factors can knock the wind out of AMD's GPU business in the coming quarters, primarily because archrival NVIDIA is now in a stronger position to capture gaming-related demand. As it stands, NVIDIA's latest graphics cards are already on sale. Meanwhile, AMD's next-generation graphics chips based on the 7-nanometer (nm) manufacturing process are expected by the end of the year.
This means that AMD is going to miss out on a seasonally strong period of the year when GPU resellers start stocking up new products in anticipation of the holiday season. Of course, AMD looks well placed to gain more market share in servers and PC processors, but it is unlikely that they will pull enough strings to offset the potential weakness in graphics cards.
That's because the company has clearly blamed weak GPU sales for its single-digit top-line growth during the third quarter, indicating that it needs to sell more graphics cards to give its top line a sizable boost. But if that isn't the case, then AMD's outlook could be underwhelming once again, and that won't resonate well with investors.