Investors and traders looking for the next catalyst for shares of Advanced Micro Devices (AMD) will soon get their wish. On October 18th, the chipmaker will report its fiscal third quarter results with an accompanying conference call scheduled for 5PM. Despite a solid run from the end of 2011 to the end of the first quarter of 2012 following a series of earnings beats, shares of the companies have seen extreme weakness as they have lost over 50% of their value in a matter of months.
During the second quarter of 2012, the company issued a revenue warning coupled with a lower-than-expected guidance for the third fiscal quarter, which accelerated the share price decline to levels not seen since the financial crisis. The company expects that a general weakness in the PC space, driven primarily by macroeconomic pressures, will lead to a down Q3 year-over-year.
This upcoming earnings report will be an important one, so here's what investors and traders on both the long and the short side should pay close attention to.
At the last earnings call, the company guided to 1% down from Q2, give or take 3%. This comes out to a revenue range of $1.36B - $1.44B. The 29 analysts following the stock expect revenue in the range of $1.34B to $1.42B, or an 18% year-over-year sales decrease.
Further, in light of Intel's (INTC) pre-announcement, many are likely worried (or banking on) about AMD issuing such a warning again in the current quarter. I do not believe that this is likely given last quarter's pre-announcement and the fairly conservative nature of the guidance relative to Intel's (which had called for sequential and year-over-year growth), but it is still a possibility that weighs on investors and provides the short-sellers with additional ammunition.
Margins And Earnings
While we already know that the bar for the top line is already set quite low, how about earnings? The average analyst estimate comes in at $0.02 per share, down significantly from the year-ago quarter and down sequentially from $0.06/share, so analysts aren't really expecting much here either.
A glance at the company's earnings history shows that AMD more often than not exceeds earnings estimates set by the analysts. However, given the guidance, the weak performance last quarter, and the general macro weakness surrounding the PC space, it makes sense that expectations are low. However, a very low bar, coupled with what is likely conservative guidance, leaves the door open for a sales and earnings beat.
The average analyst estimate for Q4 guidance is $1.46B in revenue with a range of $1.28B - $1.55B, so analysts are expecting at most modest growth for the holiday season, with a few analysts expecting the company's sales to crater. While the case for modest growth for AMD and the entire PC sector as a whole is bolstered by the fairly disappointing numbers coming out of almost all of the hardware makers, there are still a number of things that could act as positive drivers in the PC space exiting the year:
- There could be quite a bit of pent-up demand in anticipation of Windows 8 and new designs based on Windows 8
- AMD could improve on the execution issues that it experienced last quarter and improve desktop channel sales
- AMD could also take share in both the desktop and notebook markets with its APUs that offer much stronger graphics at very attractive prices relative to the Intel products
- Windows 8 tablets could see strong growth and eventually
- Nvidia's reaffirmed guidance despite weakening PC sales could bode well for AMD's discrete graphics division, which has been quite consistently posting operating profits quarter after quarter
It's Called A Macro Slump - Products Look Great
A lot of short sellers will likely scream that AMD is "done for" and that there's no hope for the company in light of the threat at the high end from Intel and then the threat from ARM-based (ARMH) tablets on the low end. However, it's absurd to think that AMD can't, with strong products and better marketing going forward, take share from Intel in the x86 space.
AMD's latest "Trinity" mobile APU has graphics that are twice as fast as Intel's "Sandy Bridge" graphics and over 20% faster than Intel's "Ivy Bridge" graphics. Further, as programs requiring more compute power start leveraging the on-board integrated graphics, AMD could very well grab the performance crown where it counts on the PC space. Discounting AMD's "heterogenous system architecture" would be a fatal long-term mistake for investors.
Oh, and in the high performance computing and server spaces, where power-efficient brute compute performance is what counts, AMD's significant lead in the graphics processing unit space will start to bolster its server lineup of products. Why buy a dedicated Nvidia (NVDA) Tesla to accelerate floating point computations when an AMD "FirePro" APU will have enough built in graphics cores to bring high performance onto the same die as the traditional CPU?
Next, let's not forget that AMD has scored the Nintendo (NTDOF.PK) Wii-U console design win for graphics and that it is very likely that the company's APU products will also find homes in the next generation Microsoft (MSFT) Xbox and Sony (SNE) Playstation consoles.
Finally, AMD, contrary to popular belief, has a tablet strategy with its low power cores and integrated graphics. Unlike Intel, which relies on third party graphics IP, or Nvidia, which relies on third party CPU IP, AMD's CPU and graphics components will be fully in-house on its tablet offerings. This will lead to pricing power and margin advantages over rivals in the Windows 8 tablet space.
Expansion Into Non-PC Segments
While AMD's bread-and-butter is and will likely remain the consumer PC segment for the foreseeable future, the company's smaller, more agile nature compared to Intel allows it to tackle niches that leverage its CPU and GPU expertise. These segments include:
- Very low power embedded processing for applications such as thin clients, set-top boxes, information kiosks, vending machines, and so on.
- Semi-custom design for applications such as game consoles
- APUs for workstations/professional applications
- Graphics products for higher end workstations
- High performance compute accelerators that leverage existing graphics technologies
Attention Shorts: No, There's No Bankruptcy To Be Had Here
The short sellers have been relentless in driving the stock down. Short interest has increased by over 50% since May of this year. AMD may have been a good short trade on the weakness following last quarter's report, but the short interest here seems to imply bankruptcy is on the table!
But here's a list of reasons why the shorts will not ultimately win:
- AMD's largest stakeholder, Mubadala Development Company, with 19.4% of the outstanding shares, is very cash-rich and very likely to pull AMD out of any financial fires should the need arise. The likelihood of Mubadala simply buying out AMD and merging it with GlobalFoundries to become a semiconductor powerhouse is not at all off the table.
- With $1.78B in marketable securities, $2.02B in debt, and still cash-flow positive, it is unlikely that AMD will need any real financial assistance anytime soon.
- Intel would not want to see AMD go bankrupt or even sold to any other competitor. AMD still owns the "-64" part of the "x86-64" instruction set. Further, if AMD's graphics technology and high performance CPU design expertise and patents were to fall into the hands of, say, Qualcomm (QCOM) or Nvidia, then Intel would have a serious problem on its hands, as the acquirer could leverage these teams' resources to develop ARM-compatible competitors to Intel's products in the desktop and server spaces. The advent of ARM-based solutions as viable competitors to x86 in the compute space would enable Intel to simply buy AMD outright to protect the IP. Also, a non-voting equity investment similar to Microsoft's investment in Apple (AAPL) in the 90s could be possible.
- AMD's products are still very competitive. There are no ARM processors out that could even come close to matching the performance of AMD's low end processors. AMD's integrated graphics also obliterate any of Intel's offerings at any price point.
Don't buy into the fear. AMD will be just fine. While it had a rough Q2, and while Q3 will likely be no better thanks to general PC weakness, in the long term, AMD will survive and prosper, or simply get bought by someone bigger.
In the short term, if AMD meets or exceeds the analyst expectations for the quarter, then this will likely drive some short covering. However, the thing that people need to really watch is the Q4 guidance. An upbeat note here could be a very real trigger for a squeeze. Also, keep an eye on gross margins. An increase from the 44% - 45% level into the 46%+ level could also be viewed quite favorably.
Finally, since the expectations are so low, the bar will be fairly easy to jump. Can AMD pull a RIM (RIMM) this quarter? We'll see on October 18th.
Additional disclosure: I plan to add to my AMD position over the next week.