Advanced Micro Devices (AMD) has had two "negative" earnings reports in a row, causing the stock to give up huge gains. Typically, the recipe for a nice surprise for longs of any stock going into an earnings report consists of a beat on both the top and bottom line, followed by strong guidance.
During the second quarter of this year, AMD beat revenue expectations and posted a smaller than expected loss, and guided to 22% revenue growth. AMD followed this guidance up with a report in Q3 that again beat on both the top and bottom lines, and gave guidance that, at the mid point, came in just a hair above analyst expectations.
After the Q2 earnings call, AMD longs were rewarded with a 10% sell off. After the Q3 earnings report, AMD longs were similarly rewarded with another steep share price decline. The difference between the company when looking at the two quarters -- AMD was not profitable and fully tethered to the PC industry going into Q2. Contrast this to Q3, where AMD generated FCF, and the market gave the company a lower overall market cap despite significantly improved financials and better than expected earnings power from consoles.
In this article, I would like to share my due diligence regarding AMD's PC market share, while simultaneously seeing how AMD's market share in the PC space aligns with analyst estimates, and the subsequent share price reaction.
AMD's PC Market Share Is Still Higher Than In Q1
A forum poster at the InvestorVillage website has posted information, based on market data done by Mercury Research, detailing AMD's significant gain of market share during Q2. The post pegs Intel (INTC) at 85.2% overall PC market share as of Q1. As a second data point, AMD's Q2 Investor Presentation states AMD gained ~2% market share over Q1.
The note 1 regarding PC market share states this report is based on data from Mercury Research, aligning it with the data from the forum poster on InvestorVillage.
So to say that AMD lost "massive" market share during Q3 would require the use of an even more grandiose adjective to describe the market share AMD gained during Q2.
The end result of Q2? Doubts regarding console profit margins overshadowed the huge gain in PC market share obtained by AMD during Q2.
Looking at the most recent quarter, an article on Benzinga notes AMD lost 80 bps of market share to Intel during Q3. While although I expected Q4 to be a little trickier for AMD to navigate due to the launch of Bay Trail, I will admit I was a little surprised by the Q3 results. But let's keep this in perspective - when I say I was a "little" surprised, I mean that quite literally. I expected revenues for Computing Solutions to be flat sequentially, with potential to be slightly up. Instead, revenues were slightly down, but overall income was up thanks to significantly lowering OPEX.
Looking at a quote from the Benzinga article linked to earlier, Citigroup states:
"Indeed, AMD's graphics revenues (including gaming) grew 110% q/q, reaching a record proportion of sales (46%). But with PC revenues down an estimated 7.6% (vs. Intel up 3.5%), AMD lost 80bps of PC related market share, offsetting gaming. With momentum now seasonally slowing, we find little reason to become excited about AMD at this time."
I am not quite sure what reality Citigroup lives in, but in the normal world the term "offset" is a synonym for "cancel." I am scratching my head trying to figure out how a decline of $50M in revenues cancels out an ~$400M increase ($400M being the amount of revenue growth specifically from consoles, based on AMD's increase in GVS revenues despite lower volumes and ASPs of GPUs while launching R7/R9 series of GPUs).
The overall result of the shifts this year in AMD's share price in relation to PC market share result in a ~$4 share price following the Q2 earnings report, with analysts ignoring the ~180 bps gain in PC market share. Console doubts were one of the biggest factors of the post Q2 sell off. Looking at the post Q3 sell off, now analysts are ignoring the fact they were wrong about consoles and are focusing on the loss of PC market share. The overall result, based on the sum of PC market share gains and losses, is that AMD still stands ~100 bps higher than in Q1, yet the share price is ~$.50 lower than after the Q2 sell off, despite tremendous top line growth and AMD's return to profitability.
John Pitzer of Credit Suisse is overall bearish on AMD. After the Q2 earnings call, Mr. Pitzer stated he felt the company's estimates for video game consoles were "too high." Following the Q3 earnings call, Credit Suisse actually downgraded AMD, despite the fact console earnings were actually a positive surprise.
Looking at Credit Suisse and Citigroup, we can see that if an opinion of AMD is preconceived, it is easy to focus on the data that helps the company fit into that preconceived mold.
In reality, console earnings were a positive surprise, but Intel gained roughly 80 bps of marketshare in the PC space. Based on more aggressive pricing and a refreshed lower priced product mix coming from Intel, I will not be surprised to see AMD lose additional PC market share in Q4. My outlook is also inline with Mr. Read's comments from the Q3 conference call, stating AMD is expecting overall PC weakness in Q4 and throughout 2014. The potential for a positive surprise comes from the seasonality of the PC industry going into the holidays, but I am expecting continued pressure while simultaneously hoping for a positive surprise in order to keep my expectations tempered.
But I think this demonstrates AMD's breakout period will come if the company manages to deliver such a beat analysts will not have a leg to stand on post earnings. A quote from MarketWatch ideally sums up the situation AMD is facing, by stating investors were expecting a "bigger beat."
"Sorry, Timmy. I know I told you that 70 was passing, and you got an 80, but you actually needed an 85. You fail."
In the first half of 2014, AMD will be releasing the company's first major big core refresh since Bulldozer debuted in 2011. I am currently working on more of a technical write-up to explain why I feel performance increases for the Steamroller architecture (the upcoming product release) will aid AMD in gaining a little market share in the PC space. And let us keep this in perspective, AMD gained 180 bps of PC market share, and the market yawned. AMD lost 80 bps of market share, and the company was punished, despite the positives. A small percent of market share for AMD is apparently a big deal. AMD's partners have had a steady roll-out of FM2+ motherboards in preparation for these new products, and based on statements made by AMD we can see the company has had strength in the desktop segment. The upcoming Kaveri APU will give hobbyists, overclockers, and DIYers a new toy for AMD to play with, meaning I think that I feel Kaveri will do well when first launch simply based on AMD fans wanting a new processor to play with. And if losing 80 bps, despite a large gain in the prior quarter, is a big deal to analysts, even Kaveri being only slightly more popular than AMD's current APUs would be a big win for the company.
Other potential positives for AMD going forward are the release of the new R9 290X GPU this quarter, as well as the R7 and R9 GPUs (which are rebrands of 7000 series GPUs, priced aggressively), along with potential data center and semi-custom design wins hinted at during the earnings call. I believe the data center win is more of a probability at this point, based on Dr. Su's stronger language - "Verizon was the first major datacenter win that we can talk about publicly." AMD is also set to release, based on leaked information, tweaks to the company's current line up of ultra-low power chips in 2014.
Keeping in mind pressures from Intel, a top-to-bottom product refresh in the back of this year and 1H 2014 could help give AMD the tools needed to maintain flat or grow revenues across all business segments, finally giving AMD the energy needed to breakout. The trick, in my opinion, will be to deliver a strong enough report to force analysts and the overall market to revisit their preconceived notions of AMD.
Additional disclosure: I own both shares and options of AMD and actively trade my position. I may add or liquidate shares/options at any time.