Advanced Micro Devices (AMD 3.55%) reported its fourth-quarter results Tuesday evening, and the numbers looked good. Revenue and earnings soared, and the company's guidance called for solid double-digit growth in 2020.
But AMD's guidance was a little problematic, enough so to drive the stock lower on Wednesday. Here's what investors need to know about AMD's results.
1. Revenue soared
Thanks to a full slate of product launches throughout 2019, AMD managed to grow its fourth-quarter revenue to $2.13 billion, up 50% year over year. Sales in the computing and graphics segment, which includes PC CPUs and GPUs, soared 69% to $1.66 billion.
AMD launched its third-generation Ryzen PC CPUs last July, alongside its first graphics cards based on its Navi architecture. Both product lines were home runs: Ryzen essentially closed the performance gap with Intel chips, and Navi made AMD competitive with NVIDIA in the graphics card market at price points below $400.
AMD's EPYC server chips helped the cause as well, but the enterprise, embedded, and semi-custom segment was dragged down by game console chips. With both Sony and Microsoft launching new consoles this year, sales of current-generation consoles have declined. The segment posted 7% revenue growth, with EPYC more than offsetting the weak semi-custom business.
2. Profits jumped, too
AMD reported non-GAAP (adjusted) earnings per share of $0.32, up from just $0.08 in the prior-year period and $0.01 higher than analysts were expecting.
Robust revenue growth was part of the equation. Also contributing was an improved gross margin: Adjusted gross margin was 45%, up from 41% in the prior-year period. Operating expenses were another factor: Adjusted operating expenses rose by 15%, much slower than revenue. The net result was a surge in the bottom line.
3. Guidance for the first quarter wasn't that great
On the surface, AMD's first-quarter guidance seems pretty good. The company expects to produce revenue of $1.8 billion, plus or minus $50 million. That's down 15% from the fourth quarter, but up 42% year over year.
Here's the problem: The first quarter of 2019 was a disaster, so the comparison is about as easy as it gets. An oversupply of graphics cards wreaked havoc on AMD's results in the first quarter last year, driving revenue down 23% on a year over year basis. The expected 42% growth rate is far less impressive when put into context.
Two years ago, in the first quarter of 2018, AMD generated $1.65 billion of revenue. So AMD's guidance calls for growth of just 9% from that higher figure. Given all the new products AMD has launched since then, the guidance is a little concerning.
4. Solid full-year growth expected
For the full year, AMD expects to grow revenue by 28% to 30%, driven by growth across all businesses. AMD should be able to win market share in the PC CPU, server CPU, and graphics markets. However, for a stock that's valued at more than 70 times adjusted full-year earnings, that may not be enough to satisfy investors.
AMD's results this year will also benefit from the launch of the PlayStation 5 and the Xbox Series X. AMD chips power both new consoles, so the company will get a revenue boost once those semi-custom chips begin shipping. The third quarter is usually the strongest for AMD's console chip business, as inventory is built up for the holidays.
AMD stock was down more than 6% on Wednesday afternoon, as the market digested a somewhat complicated report. The revenue and earnings beats were offset by so-so guidance, and a lofty valuation raised the stakes.
AMD could outperform its outlook this year if it can turbocharge its market share gains, but the stock may have gotten out ahead of what the company can realistically deliver.