This was a disaster waiting to happen: Shares of Advanced Micro Devices (AMD 1.30%) cratered massively after a disappointing third-quarter report and tepid guidance made it clear that the company is losing steam. But those who have been watching AMD closely could see this coming from far away.
AMD's current-generation Vega graphics cards weren't as good as those from rival NVIDIA (NVDA +0.10%) when it came to playing games. However, AMD cards were reportedly more capable at mining certain types of cryptocurrency when compared to NVIDIA's offerings.
So AMD went ahead and optimized its GPUs for cryptocurrency mining with the help of software updates. This move should have helped it curry favors with miners and boost sales, helping it mint "easy money" in the words of my colleague Timothy Green. In fact, one of AMD's crypto-specific GPU upgrades in August last year had clearly mentioned that the new GPU driver was "not intended for graphics or gaming workloads," indicating just how serious the company was about this opportunity.
AMD's website also shows that it has struck partnerships with seven companies to offer rigs based on its GPUs to power "Blockchain compute solutions," which again shows that the company was looking to capitalize on the cryptocurrency-driven opportunity
As such, AMD's predicament isn't surprising: The company was cashing in on the cryptocurrency mining boom and possibly lost sight of the video gaming market. Meanwhile, arch-rival NVIDIA went on the offensive by launching a new set of GPUs (graphics processing units) to curry favor with the video gaming audience.
What's even worse is that, thanks to its missteps, AMD won't be making a comeback anytime soon.
Image source: Getty Images.
Adverse times for AMD
GPU prices had spiked big-time after cryptocurrency demand created a supply shortfall. As a result, AMD's top and bottom lines were growing at a blazing pace, because the company was considered to be the prime beneficiary of crypto-driven demand. In fact, at one point last year, cryptocurrency mining was driving a third of the sequential growth in the company's computing and graphics segment.
But now that cryptocurrency-related GPU demand is waning, AMD needs to be worried for two reasons. First, prices are falling due to excess GPU inventory. AMD management pointed out on the latest conference call that it witnessed excess channel inventory thanks to a "decline in blockchain-related demand that was so strong earlier in the year."
Second, there's a probability that as cryptocurrency miners move to dedicated mining chips, they could start flooding the market with pre-owned GPUs at discounts. This is bad news for AMD since it's taking longer to sell its products as-is.
AMD Days Inventory Outstanding (Quarterly) data by YCharts.
Not surprisingly, the company expects its revenue to decline year over year in the fourth quarter, a far cry from the 33% annual growth it recorded in the same period last year. More specifically, AMD's guidance of $1.45 billion is around 2% lower than the year-ago quarter's top line of $1.48 billion -- a clear sign that its days of spectacular growth are over.
A turnaround looks like a pipe dream
AMD has been gaining impressive market share in GPUs, but the loss of the cryptocurrency catalyst could give NVIDIA an upper hand. That's because NVIDIA's latest-generation GPUs based on the Turing architecture are already on sale, while the company's competitive cost structure gives it the freedom to lower prices and capture more market share.
As it turns out, NVIDIA has not only launched an array of graphics cards targeting the gaming, data center, and professional workstation markets, but has also received support from key players that are willing use them in their solutions. The likes of Cisco, IBM, Oracle, and Dell EMC, among others, have decided to support the recently launched Tesla GPUs in their data centers.
On the other hand, AMD will launch its next-generation data center GPU by the end of this quarter, giving NVIDIA a head start -- the latter's latest Tesla T4 GPUs were announced back in September. NVIDIA enjoys a similar head start in the gaming space, as its latest graphics cards are out in time for the holiday season, while AMD recently said that its 7nm discrete graphics cards are expected "over the coming quarters." Meanwhile, NVIDIA has started optimizing its new GPUs for titles such as Battlefield V already in a bid to make its graphics cards more appealing to gamers.
Investors should watch to see if AMD's GPU market share slips in subsequent quarters as gamers and data center companies flock to NVIDIA for their requirements.
Ominous signs
The loss of AMD's growth momentum makes it a risky bet given its rich valuation. The stock is expensive, with a trailing price-to-earnings ratio of 72 even after crashing severely post-earnings.
Looking out, analysts are expecting the company to post modest earnings-per-share growth over the next few years -- AMD is expected to report $0.46 per share in earnings during the ongoing fiscal year 2018, which will be a massive jump over last year's EPS of $0.17. The growth rate, however, will slow down in fiscal 2019 as EPS is expected to increase to $0.63.
But further out, the story could stall. Yahoo! Finance estimates suggest that AMD's earnings will increase at a compound annual growth rate (CAGR) of only 0.56% over the next five years. These low expectations reflect the competitive marketplace and the uphill battle AMD will have fighting the likes of NVIDIA for the more predictable gaming GPU market.
All told, absent another crypto boom, AMD's era of high flying growth might be over.
