Advanced Micro Devices, Inc. (NASDAQ:AMD) cratered today, losing around 20% of its market cap after a disappointing earnings report.

AMD slightly missed top line estimates but posted 18% YoY revenue growth in Q12017 over Q12016. This growth comes on top of a 2% increase in the company’s gross margins. Top line growth in the gaming segment was phenomenal with 29% YoY growth resulting from stronger desktop and graphics processor sales.

Some investors will be surprised to see such a large correction in AMD’s stock after what looks to be pretty healthy growth in the company’s core business. The drop, on the surface, looks like an overreaction and could possibly be retraced in the coming weeks. Aftermarket trading is volatile and sometimes doesn’t reflect the realistic impact of a news event.

But unfortunately, even if the stock price recovers, Advanced Micro Devices will retain its core problems of overvaluation and heavy short interest.

Lack of Profitability & Heavy Short Interest

Advanced Micro Devices is priced for perfection. And that means the market has already baked in so much growth that anything less than stellar performance will have an outsized negative impact on the stock price. On top of this, All the top line growth in the world is meaningless if margins are too low for profitability.

When a company operates at a GAAP loss, its stock tends to attract greater scrutiny and short interest. AMD generated a GAAP operating loss of $29 million this quarter, and this translates to a loss per share of $0.08. While the Q1 gross margin improvement is a welcome development, it is simply the result of changes in AMD’s sales mix due to some segments growing faster than others.

Revenue is increasingly derived from the higher margin computing and graphics segment. Comparing Nvidia with AMD reveals that AMD still has significant room for improvement in its gross margins (TTM data).

Cash on the balance sheet is an important issue for Advanced Micro Devices because the company generates operating losses and has weak cash flow. A significant Q1 drop in cash and equivalents is part of the reason why investors are reacting so negatively to AMD’s earnings results despite in-line growth.

AMD reports cash, cash equivalents, and marketable securities of $943 – a troubling $321 million drop from last quarter. The weakening liquidity comes against a backdrop of significant interest expense and rapidly increasing inventory on the balance sheet.

Future Outlook & Conclusion

The good news is that AMD has a solid pipeline and plenty of growth drivers for the future. The company’s Ryzen is yet to reveal its full impact and should support top line growth and margins in the second quarter. In addition, Vega is scheduled to launch in Q2 along with the high-performance Naples CPU. Investors can also look forward to Project Scorpio with Microsoft.

However, despite all these growth drivers, AMD only guides Q2 revenue growth of 12% YoY – a figure that somewhat tempers the excitement many investors had for the many releases expected in the second quarter. The weak guidance along with heavy short interest, declining liquidity, and weak bottom line performance, keeps AMD an unattractive stock for the remainder of 2017.

 

Disclaimer: The author has no position or business relationship in any stock or company mentioned in this article, and he has no plans to initiate. The author is not receiving compensation for this article expect from Smarter Analyst. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.