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AMD's Q4 2018 Earnings Will Again Be Bad For Its Stock Price

|Includes: Advanced Micro Devices, Inc. (AMD)
Summary

H1 2019 will be lower than H1 2018 and H2 2019.

Most new products are ramping up in H2 2019. There will be Osborne effects this time.

China + Crypto + Console revenue loss in H1 2019 will be severe.

By end of 2019 AMD stock price will again recover, at mean of $20. My current price target for 2020 is $27 (EPS=0.90 * Earnings Growth Factor=30).

The stock price should be less than $20 by June-July period.

  1. Q4 2018 Guidance is $1.45b+-50m. This takes care of the reduced revenue because of crypto and consoles. Similarly the Guidance(predicted) for Q1 2019 after removing the crypto+console revenue is 1647-150 = $1497m. Add to this extra revenues from new products we get $1497m+75m=$1572m. Now it seems the guidance from AMD (and other companies like Nvidia) does not include the loss of revenue because of China Slowing Down. Dr. Lisa Su did say that there is some loss of revenue from China and AMD's exposure to China is 24% of total revenue. As technology , in many cases, is discretionary expenditure I will predict that China demand has reduced by 20% of 24% at least. So we need to reduce the Q4 2018 AND Q1 2019 revenue by this amount.

    With this we get Q4 2018 between $1340m and $1428. Q1 2019 (using Q1 2018 revenue as reference) is then $1496m. So we can safely say that higher end revenue for Q4 2018 will be $1428 which is higher by 6.5% YoY and guidance for Q1 2019 is $1500m which is down 9.8% YoY. EPS for Q4 2018 will ~12c and Q1 2018 will be ~11c.

    So the EPS for 2018 is 50c(above expectation). For 2019 the EPS expectation will be between 60c and 65c.Total revenue for 2018 will be 1647 + 1756 + 1653 + 1428 = $6484m. This is 23.4% YoY (2017 revenue=$5253m)

  2. Looking again at Q4 2018 earnings and Q1 2019 guidance using past revenue, QoQ , from Q32017 to Q42017 we get a drop of 15% in Q4 2017 from Q3 2017. This gives us Q4 2018 as $1405m. The growth in revenue between Q4 2017 and Q1 2018 (after removing Crypto+console revenue loss) is 15%. Using similar QoQ growth value we get Q1 2019 as $1573. Averaging (1), (2) revenue numbers we get Q4 2018=$1416m and Q1 2019 guidance as $1536. This means Q4 2018 revenue growth YoY will be 6%, Q1 2019 guidance will be lower by 4.5% YoY. EPS for Q4 2018 will ~10c and Q1 2019 will be ~12c.

    So the EPS for 2018 is 48c. For 2019 the EPS expectation will be between 60c and 65c.Total revenue for 2018 will be 1647 + 1756 + 1653 + 1416 = $6472m. This is 23.2% YoY (2017 revenue=$5253m)

  3. EPS growth for 2018=354%, EPS growth for 2019=20%, Revenue growth for 2019 will be between 5% to 10% (First half revenue will be lower, second half revenue will be higher as compared to 2018). EPS growth between 2019 and 2020 as 50%. Revenue growth in 2020 will be around 10%. Lets takes avgs of 2018 revenue growth, 2019 revenue growth, 2019 eps growth , 2020 eps growth, 2020 revenue growth(omitting 2018 EPS growth as 2017 eps was too low). We get (23.4 + 7.5 + 20 + 50 + 10) / 5 = 22.24%. This means that current stock price of 20.77 is theoretically overpriced by 1.85 times. Even if consider a PE of 30(much higher than industry avg of 20) we get theoretical stock price at $15. AMD has the financial model for 2020 with EPS as 75c. However AMD already told the eps in 2020 will be higher than 75c. Lets say its 90c. So the EPS growth between 2018 and 2020 will be 1.8 times. This gives 2020 theoretical stock price(on the low end) as 0.5 * 20 * 1.80 = $20 and higher end as $27. AMD stock doubled in 2018 but we cannot expect that in 2019 as revenue growth has slowed down. All this means that you can price AMD stock price anywhere between $11.12 and $15 for 2018 , $14.0 to $18.75 for 2019 and between $20 and $27 for 2020. This means AMD stock price will remain sideways for 2019. For this to happen AMD stock price needs to fall towards $16(from technicals) after Q4 2018 earnings on Jan 29th 2019
  4. AMD Q1 2019 guidance will be the first YoY (year-over-year) revenue decline in 12 quarters(in the first quarter), as AMD’s revenue for the first quarter of 2018 included crypto-related GPU sales and this quarter will not.
  5. Based on (1) , (2) , (3), (4) AMD stock is going to fall after Q4 2018 earnings. Technically I see the downside to be between $16 and $17. Stock Price will recover by EOY and can be as high as $25(again based on technicals).
  6. Ryzen 7nm, Navi, 12nm Ryzen Laptops, ROME, Radeon VII will help in improving the revenue as we go through 2019. Second half of 2019 will be much better than first half of 2019. AMDs market share will grow slowly over years as its a multigenerational process.
  7. Dr. Lisa Su said that 2017 was the year for product Rampup, 2018 for revenue growth and now in 2019 she is saying that its not one year affair but a multigeneration effort for the stock price to go up. Regarding China Trade slowdown she mentioned that AMD is also effected and we have to work through these disturbances but in next 2-3 years(long term) we are fine. She said there is little bit of slow down in second half of 4th Qtr. because of China Trade Tensions. China Market is about quarter of AMDs revenues(Lisa Su said this). This means Q1 2019 guidance will be effected. However she hedged this loss by saying that other parts of their revenue is just fine. She also said that 2020 EPS, as mentioned in financial model, will be higher than 75c. All this makes me take a pause and think "What's going on in 2019?". Basically AMD just can't help it. Crypto revenue+Consoles is causing a big hit to the revenue in the first half of 2019. Lower China revenues is a double whammy. I would have liked to hear Devinder Kumar, CFO. He is not so subtle as Lisa Su.There are disturbances, but we see good growth in the Chinese market, says AMD CEOCES 2019: Lisa Su of Advanced Micro Devices I Fortune
  8. Intel's earnings will be declared on Jan 24th 2019 and AMDs on Jan 29th 2019. Intel is not effected by Crypto+Consoles. Also Intel is losing miniscule market share currently. In 2006 when AMD stock price did well AMDs market share for CPU was ~50%. Currently its only 20%. So anyone comparing the earnings between these two companies will favor Intel over AMD.
  9. AMD stock dropped after Q4 2017 earnings from $13.74 to $9.77. (From 01/31/2018 to 4/4/2018). This was a drop of 28%. Similar drop after Q4 2018 earnings will take the stock price to ~$15.
  10. AMD has been the best performing stock in 2018. We can not expect the same in 2019 if AMD cannot deliver on revenues and earnings. First half of 2019 will not be good while second half will be better. So Wall Street will be very careful after Q4 2018 and many will play from the short side. Earnings have flywheel effect. Good earnings keep going for quarters and does not stop suddenly and vice versa. Q3 2018 was not good and this will continue at least upto Q2 2019
  11. There will also be loss of revenue because of Osborne effect. AMD is very aggressive in showing its roadmap. This causes problems for sale of existing products. Customers will now wait for Ryzen mobile 2nd generation, Navi, Rome and Ryzen 3000.
  12. On 01/22/2019 China GDP came out and it was the worst in last 28 years. AMD stock fell by $1.01 to $19.76. We already know that China Trade War will effect earnings negatively. So this fall is good. Not much positive sentiment going into earnings and the bad news is getting imputed into the stock price so it becomes a little bit easier to predict the stock price after the earnings.
  13. Since H1 2019 is going to be lower and also the guidance for Q1 2019 will be poor AMD needs to manage the expectations for 2019. My guess is that they will declare some good news like revenue growth of around 15% to 20% for 2019. If they can also say that earnings will grow by at least 30% then this will be positive. Semiconductor Slowdown Scare Could Be Shortsighted
  14. I am still watching the stock price and depending on the price action will determine if I need to exit my positions or continue holding(If I hold then it will be for my short leg of Call Spread to expire worthless and long end call to recover its value by end of year).

Disclosure: I am/we are long AMD.

Additional disclosure: I may go flat going into Q4 Earnings 2018 depending on price action