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AMD Underreacts (To Guidance)

Feb. 11, 2019 9:17 AM ETAdvanced Micro Devices, Inc. (AMD)251 Comments
Kwan-Chen Ma profile picture
Kwan-Chen Ma


  • In response to a clearly negative Q4 earnings announcement, AMD shares have surged more than 27% from the ER date.
  • The counter-intuitive price moves may be a mixture of investors’ response to a simultaneous mix of downside Q1 and Q2 2019 revenue forecasts and upside Q3 and Q4 2019 revenue estimates.
  • I developed a forward-looking AMD model which prices the stock based on management’s guidance on revenue, EPS, and gross margin of the next 4 quarters.
  • Based on the historical way how AMD shares used to respond to guidance changes, the 27% gain is deemed excessive.
  • AMD’s shareholders have "underreacted" to the negative information conveyed by the downside revenue guidance.  Just based on guidance alone, AMD shares have been traded at a $4 premium or overvalued by 20%.

After Nvidia’s (NASDAQ: NVDA) surprise pre-warning of a lower Q4 revenue guidance, AMD (NASDAQ: NASDAQ:AMD) was expected to deliver a similar disappointing Q4 earnings release (ER) for the crypto-related excess inventory. Just a few days later, AMD announced that it missed Q4 revenue, met EPS, and lowered Q1 revenue guidance, yet AMD's shares surged close to 30% in response.

Of course, this is a particularly volatile time for the stock market. With ongoing trade war negotiation, Fed’s changing stance of interest rate policy, and a looming global economic slowdown, investors are hungry for any clues to indicate the future outlook. Given most bellwether stocks like Facebook (NASDAQ: FB), Apple (NASDAQ: AAPL), Taiwan Semiconductor Manufacturing Company (NYSE: TSM), and AMD and Nvidia Q3’s ERs have been already punished by the market for their downside revenue guidance, it is not surprising that AMD shareholders have initially reacted to the Nvidia’s warning of the downside guidance. However, it's surprising how AMD can respond so positively to its own obviously negative ER. Many have offered justifications to the counter-intuitive share price reactions as "not as bad as Nvidia's pre-warning has suggested," "the market has priced in the worst," and "AMD's downside guidance is not as bad as the pack." Some argued that just like briefly hitting $34 after Q3 ER, AMD shares have been in a bubble. Incidentally, around the same time, one of AMD’s largest shareholders Mubadala Investment disclosed selling 34.9M shares and plans to convert 75M warrants. In this post, I like to offer my take that AMD has underreacted to its downside revenue guidance and the 27% gain was excessive.

Stock Price and Revenue Guidance

Generally, Wall Street takes management guidance very seriously. As guidance is often the only source of company’s new information, analysts use it to formulate their estimates and recommendations. Accordingly, in Figure

This article was written by

Kwan-Chen Ma profile picture
K C Ma, Ph.D, CFA, is the Eminent Scholar and the Mary Ball Washington/Switzer Brothers Endowed Chair of Finance at University of West Florida. I am the Director of Argo Investments Institute which enables college students to manage real money stock, bond, and option funds. I manage market-neutral institutional hedge funds in KCM Asset Management. I write about stocks, bonds, and derivative strategies, long or short, based on our quantitative processes.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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