Advanced Micro Devices, Inc. (NASDAQ:AMD) shares took a 24% decline once the chip giant posted earnings May 1st, nosediving on back of underwhelming gross margin guidance for the second quarter of 2017. Some analysts will argue and see this as a buying opportunity. Many on the Street continue to back the semi-conductor stock, believing this Wall Street player can do no wrong. Yet, can these optimistic AMD enthusiasts simply shut out the fact that the stock suffered its worst one-day loss in more than 12 years-time?

Is this chip giant a compelling investment, with its potential for rebound and hyped up product launches? There is a real pressing argument for the alternative: that this buzzed-about tech player is simply another water mirage, with investors foolishly drinking in when they should be pouring out before losses loom larger.

Let’s explore and dismantle the bull case for this popular stock:

  1. Guidance popped the optimism bubble. It must have taken investors for a wild ride of shock-and-less-than-awe considering so many releases were slated to hit this year that guidance was such a slap. The truth is the print was not a total flop. Yet, AMD investors have surrounded the stock with this sense of untouchable reverence, which has bolstered valuation of late. Then, suddenly, shareholders were forced to pay attention to that ‘man behind the curtain,’ sending the stock on a biting slump. Shares are since recovering- but be forewarned: what comes up must come down again. This may be the most dramatic warning for investors, but it certainly will not be the last. It means something that the AMD team has subdued expectations during a period that should have been a golden one beckoning in the era of the Ryzen releases.
  2. Lack of obvious passage towards profitability. Margins need to be much stronger for AMD to turn the profitability corner. The chip giant posted an adjusted loss of $0.04 per share this quarter, which while it was not the culprit for expectation shortcomings still is not yielding a gain. Is R&D spending escalating overboard? Clearly to design products like Ryzen, especially with gaming complaints trailing that the products could be improved, the expense is worthwhile. However, for AMD to truly compete in the chip maker arena, S&GA will also need to deescalate at some point, hitting $387 million this quarter- even greater than R&D at $266 million.
  3. Let the chips fall where they may- AMD faces cutthroat competition. With towering giant NVDA boasting a gross margin near twice AMD’s size and CEO Jensen Huang ready to fight back AMD’s Ryzen launch with some Radeon RX Vega graphics heat, this is a landscape that needs AMD’s Vega June launch to be robust. Ryzen expectations were meant to be high, and now clearly from the outlook, that is not so much the case. NVDA is already fiercely battling for the leaderboard, and the CEO has made it clear with its Volta-based Tesla V1-graphics card, NVDA is not planning on backing down from the top any time soon.

Investors will duke it out with any naysayers who dare to question the all great and powerful AMD. Yet, sometimes proceeding with a bit of caution, particularly when the shooting star of a stock trips up massively is not an unreasonable move forward. NVDA seems to be more stable, and should its graphics card knock AMD’s Ryzen enthusiasm out of the water, shares could fall again.

 

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.