What happened
Semiconductor giant Advanced Micro Devices (NASDAQ: AMD) eked out an earnings beat last night, reporting a (non-GAAP) profit of $0.60 per share on sales of $5.35 billion where Wall Street had expected only $0.56 per share on $3.5 billion. Wall Street reacted with confusion to the news, with investment bank Craig-Hallum upgrading the stock to buy and four other analysts raising their price targets, while TD Cowen and Raymond James lowered their price targets -- and Bank of America downgraded AMD to neutral.
Investors weren't confused at all. Ignoring the bulls, they promptly sold off AMD stock, which as of 10 a.m. ET is down 8.6%.
So what
To explain that reaction, though, some clarification of the above numbers is probably in order. Let's begin with the revenue beat. On the one hand, yes, AMD beat on revenue, reporting more sales than Wall Street had forecast. But revenue still declined 9% year over year.
On profits, well, gross profit margin fell 4 full percentage points to 44%, and operating profit margin flipped from positive 16% to negative 3% -- a 19 point reversal. Thus, while AMD reported better-than-expected non-GAAP earnings for the quarter, its earnings when calculated according to generally accepted accounting principles (GAAP) were actually negative, with AMD losing $0.09 per share for the quarter.
Now what
All that being said, AMD CEO Lisa Su seemed happy with these numbers, arguing that AMD "executed very well in the first quarter" of 2023. And CFO Jean Hu predicted that growth in AMD's data center and client businesses would offset "modest declines" in the company's gaming and embedded businesses in Q2 (so that revenue holds roughly flat), and that the whole company would begin to see sales recover in the second half of this year.
That prediction may sound premature, but investors upset at today's sell-off on an "earnings beat" can at least take heart from one thing: AMD is forecasting sales of anywhere from $5 billion to $5.6 billion for Q2 -- the entire range of which is above the $4.9 billion consensus estimate on Wall Street. What's more, management foresees no further margin erosion, predicting that non-GAAP gross margin, at least, will hold firm at 50% next quarter. Assuming AMD knows its business better than the analysts who follow it do, this implies an even bigger earnings beat could be coming down the pike three months from now.
The losses AMD investors are suffering today, while substantial, may be only temporary in nature.
