AMD's (NYSE:AMD) results disappointed investors as shares traded lower in after hours Thursday. Most analysts were projecting revenues above AMD's Q3 forecast which, in my opinion, sent shares lower after hours.
In this article I would like to look at AMD's numbers to see how they align with analyst estimates, explain why I believe these numbers could trigger downgrades, and finally outline why I believe 2015 is a rockier scenario.
The Results Compared To Estimates
Source: Yahoo estimates, AMD CFO Commentary for various quarters
The above tables reflect previous quarters and analyst expectations prior to last night's earnings report. The Q2 2014 figure from the first table was constructed earlier based on forecasts, and does not reflect the actual earnings from Q2 which are outlined below.
In my opinion, and if you run the numbers, it is the fact that guidance came in below analyst estimates that sent shares lower. Also, CEO Mr. Rory Read described the third quarter as "the peak quarter" for the gaming console ramp. During the Q&A session, it seemed that analysts were taking this to mean there was a potential for revenues to drop from Q3 to Q4. Here is the relevant quote:
And I wanted to kind of get your comfort specific to that segment of the market that you guys have higher relative exposure that if we have game consoles peaking here in Q3 that that isn't going to be the peak also for your year in terms of quarterly revenue. How do we get some comfort that there is not more here than just the exposure between corporate and consumer particularly in that low-end where you have pretty decent amount of market share?
So prior to Thursday, analysts were forecasting revenues above AMD's guidance. If analysts start adjusting revenue estimates down, this could lead to downgrades, spurring further decline.
Understanding The Future
In two of my previous articles, I have pointed out why I felt AMD could be range bound until we see some real growth. In the interest of time, I will not rehash what was put forth in these articles, but instead just provide links and some rationale behind my thought.
First, the major update from this quarter was from AMD's Core Innovation Day. In this, we finally got a peek as to where AMD was heading with its product roadmap. But in the article, I outlined why most of these catalysts were stories for 2015 and 2016, but more heavily concentrated in 2016.
Author's note: The article linked to in the following paragraph discusses speculation which may or may not be accurate regarding products from Intel and Nvidia, but it is relevant to this discussion.
Regarding AMD and Nvidia, there is the potential we see new flagship GPUs from Nvidia, and AMD potentially releasing a GPU for the mainstream market.
Regarding Intel and AMD, leaks point to Intel beefing up integrated graphics in the follow up products to both Haswell and Bay Trail, which could offset one of the large advantages AMD holds over Intel. Note that we know nothing about the follow on to either of AMD's respective competing products, so this is something more to watch out for. But unless AMD is able to get more bandwidth to Carrizo, the GPU is essentially memory bottlenecked. However, there is plenty of room to beef up graphics in the SkyBridge SoCs, but AMD is being mum on what changes to expect here.
Now, here is the tricky part. When you buy AMD stock, you're buying both the prospect of future growth, and you're also inheriting the competition with Nvidia and Intel, so you have to look at AMD's competitive standing.
And when you're buying at higher share prices, you're more heavily weighting your money toward the risk from Intel and AMD. Conversely, if you are able to maintain a low relative cost average, you're able to weight more heavily for the potential upside from the 2015 and 2016 products. Maintaining a low cost average also gives the advantage of trimming back on a run up to protect some capital.
If we are considering the increased competition a negative, which it very much is, I consider AMD's focus on maintaining profitability, at least at the non-GAAP level, a positive.
First, Mr. Read discussed how AMD is picking and choosing where to deploy resources, and explicitly stated he is deploying these resources directly at the future of AMD, rather than chasing secondary projects. If you filter through the numbers, saving OPEX budget would be amplified if it were reverse-calculated to the revenue line. This has helped AMD more than anything, in my opinion.
Second, AMD isn't blindly chasing market share. Intel is in a tight spot with their contra revenue program. I essentially view Bay Trail as a placeholder until Intel can get a better mix of products into mobile. AMD doesn't have this luxury as its pockets are much shallower than Intel's. Instead, management talked about picking their fights intentionally, and focus on driving ASPs higher rather than absolute volumes. However, this point is likely to get drowned out in market share reports.
The issue here, unlike with previous sell offs, is that AMD fell short of analyst expectations. This could shake investor confidence further, making the bottom harder to call.
And herein lies the crux: AMD has several catalysts that could trigger future growth, but these potential catalysts are either harder to lock down or are a few quarters in the future. For example, there is the potential for the one to two semi-custom deals to be finalized, but because of the confidentiality of these deals, we may or may not get more relevant information after they are finalized. Regarding microservers, this is a play that is really in its infancy. Q4 2014 will represent the availability of the first commercial shipment, but it will likely be 2015 when we could first see any meaningful revenue impact, followed by 2016.
For the negative side, it could be bumpy. AMD is likely to face stiff competition in its core market during 2015, and concepts like the SkyBridge platform, although unique and differentiated, are unproven. And as long as the market places emphasis on the PC sector, there is nothing we can do except for understand its relative importance.
From a financial standpoint, the debt on AMD is cumbersome. AMD incurs ~$42M each quarter in interest payments on debt, which eats directly into the bottom line. Although AMD did take steps during recent quarters to refinance this debt, at some point it will have to be dealt with, and will continue to weight the share price down until it is.
Until AMD posts meaningful profits at the EPS level, I will continue to view AMD as a speculative play and treat it as such.
Based on the soft guidance and possibility for downgrades, I believe we could see additional downside as AMD finds a new base. If you are looking for growth in the near term, I believe it could be harder to come by.
For those with a long horizon and a stomach for volatility, AMD will likely present some much lower entry points over the coming weeks as the dust settles. Right now, it is my belief that AMD is held back by its CS segment. Competition from Intel will be a concern in the near future, with a possible reprieve when AMD launches its new product stack next year.
Based on leaked information from Carrizo, I am more hopeful for the SkyBridge platform than AMD's last big chip from the machine family, but as this is based on leaks, we will have to wait and see how the final products shake out. But in 2016, AMD is scheduled to release two new cores. And it's these two new cores that I am closely watching out for.
But 2016 is an eternity away in technology, so it will be important to keep an eye on AMD's competition and financial health in the interim, and to adjust accordingly.
Disclosure: The author is long AMD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own both shares and options in AMD, and may add or liquidate shares or options at anytime. I also trade short term options in AMD, and may trade either short term calls or puts at anytime. I will exit some, or all, of my position within the next 72 hours, and may write covered calls against some of my shares.