Advanced Micro Devices, Inc. (NASDAQ:AMD) had seen its shares soaring an astounding 866% from $1.61 on July 27, 2015, to a ten-year high of $15.55 in intraday trade on February 28, 2017. However, since then the stock has retreated 34.5% to $10.19 on May 05. The major part of the decline was on May 02, 24.2% after the chipmaker delivered disappointing first quarter 2017 results. Nevertheless, since the fundamentals of the company have not changed investors might wonder if now is the right time to buy AMD’s stock. In this article, I will indicate recent developments in the company’s business that could help investors to reach a decision about investing in AMD’s stock.
AMD Daily Chart
Chart: TradeStation Group, Inc.
On May 01, AMD reported its first quarter 2017 financial results which were mostly in-line with expectations. The company reported adjusted loss of $0.04 per share which met analysts’ estimates. Revenue increased 18% year-over-year to $984 million, slightly missing the average expectations for $984.4 million, as shown in the tables below.
As the results were practically in-line with expectations, what caused the crash in AMD’s stock of 24.2% on the next trading day after reporting (AMD reported after market close)? The answer might be in the outlook that the company provided for the second quarter of 2017. While the company estimated revenue between $1.12 billion and $1.18 billion was better than the average estimate for revenue of $1.12 billion, the gross margin guidance for a sequential decline of 0.6% was very disappointing. As the chipmaker has introduced new products a better product mix and a higher gross margin was expected for the current quarter with full quarter revenue from Ryzen CPU which was launched at the beginning of March and initial shipments of Vega GPUs. Also, Naples, the high-performance x86 server CPU, is due to be launched in the second quarter. All in all, the introduction of these new products should lead to higher gross margin. As such, it is pretty obvious that the outlook for a sequential decline in the gross margin worried investors. The non-GAAP gross margins for nine last quarters are shown in the chart below demonstrating no significant improvement despite new promising products.
*Q2 2017 – estimate
Let’s compare AMD’s non-GAAP gross margins to its competitors Intel Corporation (INTC) and NVIDIA Corporation (NVDA), and to the memory chips producer Micron Technology, Inc. (MU). The chart below shows the four chipmakers recent quarter gross margin compared to the same quarter a year ago. The chart clearly demonstrates that AMD’s CPU competitor Intel and its GPU competitor NVIDIA have a much higher gross margin. Even Micron which had a lower gross margin a year ago had been able to increase its recent quarter gross margin to 38.5%. What’s more, while AMD expects a decline in its gross margin in the current quarter to 33%, Micron expects a significant increase in its gross margin to 46% in the current quarter. According to this important parameter, AMD’s stock is less attractive than its competitors.
AMD’s stock has pretty high short interest as a percent of the float, 14.35%, the third highest among the 81 Russell 1000 technology companies with a market cap greater than $8 billion. The high short interest as a percent of the float indicates that many people expect the stock to fall. On the other hand, if AMD would show some improvement, a short squeeze could drive the stock considerably higher.
I have been quite surprised to see so many top analysts, according to TipRanks, reiterating their recommendation on AMD’s stock in the last few days. In fact, eleven top analysts have reiterated their opinion during the previous five days as of May 06. The average target price of the best performing analysts covering AMD’s stock is $13 representing an upside of 27.6% from its May 5 price of $10.19.
As I see it, the recent retreat in AMD’s stock price could be a proper opportunity to start buying the stock. However, despite the high upside for the stock seen by top analysts, I would rather wait for some positive development before investing in AMD’s stock. I recommend to investors who are considering buying the stock right now to wait for NVIDIA’s first quarter fiscal 2018 report scheduled on Tuesday, May 9, after market close, before taking any decision. If in contrast to AMD, NVIDIA would show a significant growth in its gross margin in the quarter, its stock might be a better investment than AMD’s stock.
DISCLAIMER: I own shares of INTC and MU, and I do not own shares of AMD and NVDA right now. This article expresses my ideas and opinions. I believe that the information I have given in this article is from reliable sources and accurate. I recommend readers to do their research before making any investment decisions.