Julie Lamb

About the Author Julie Lamb

Julie graduated with a Bachelor of Arts in English with a focus on creative writing from the University of Louisville.

Advanced Micro Devices (AMD): Get Ready for a Growth Dip in the Back Half of 2018

Seeking Alpha's Michael Wiggins De Oliveira frankly sees Nvidia as the better stock pick over AMD; here's why.

Advanced Micro Devices (NASDAQ:AMD) investors should brace for a key “slow down” in growth for the chip giant, if blogger Michael Wiggins De Oliveira‘s prediction comes to light. The blogger advises to anticipate waning growth come the back half of this year, raising an eyebrow at a stock that towers “5 times more expensive” than rival chip giant Nvidia (NASDAQ:NVDA). This does not go unnoticed for Wiggins De Oliveira, who points out that Nvidia poses “similar underlying growth” as AMD, but at a fraction of the cost.

The blogger makes a bearish call that AMD is primed to “correct back to $9,” which would pose a 35% downside from current trading levels. “I argue that investors might have failed to recognize that in spite of AMD’s supern H1 2018 performance that its second half of 2018 will mark the performance of a very different company and that its present valuation is not fully reflecting this imminent slowdown,” writes Wiggins De Oliveira.

Consider that the chip giant pulled off a strong first quarter, with revenues soaring 40%, as well as issued a robust guide for the second quarter, expecting $1.75 billion in revenue, give or take $50 million. Even Wiggins De Oliveira acknowledges these are “solid numbers, no doubt.” That said, the blogger adds on a more negative note, “This performance is nothing short of astonishing, but I’m not entirely convinced of its foundation.”

Wiggins De Oliveira take note of CFO Kumar’s statement during the first quarter earnings call, which reveals an ASC 606-spurred accounting shift will lead the AMD team to post numbers a bit “differently” moving forward. Though in the past the third quarter seasonally would prove to be a quarter yielding a better performance, the AMD team now angles to yield “more of revenue” in the second quarter this year than in past years.

“Consequently, it will bring forward some revenue but leave a void in a future period. Said another way, overall, for full year 2018, this accounting standard will have little effect on its performance,” continues the blogger. Now, the analyst calculates the guide of mid-20% will translate up 28%, which would take AMD’s mid-revenue outlook up to $6.80 billion for 2018.

Additionally, the analyst calculates the back half of 2018 will result in a “marked slowdown” against comparisons for the company’s first half of the year. It results as a “staggering difference” for the company to grow at over 50% year-over-year to merely 9% in the back half of the year. In fact, this is even riskier for AMD’s anticipated second half of the year performance when sizing up the company’s need to yield stellar free cash flow in the back half of the year- particularly if AMD can hit the blogger’s projection of $50 million of free cash flow for full year 2018. This is considering that $50 million of free cash flow stands as Wiggins De Oliveira’s most confident expectations.

Meanwhile, the analyst draws awareness to Nvidia once more, calling the chip giant “arguably the superior competitor of the two;” a company rising at the same CAGR, but with investors not as eager to pay as they are for AMD. Wiggins De Oliveira pokes holes in the investment story that AMD is giving Wall Street a comeback, saying that no “turnaround” can offset a company challenged in fulfilling its “obligations.”

After all, already by the close of the first quarter of the year, AMD’s inventory slipped approximately 14.8% year-over-year, with the same revenue rising 40% year-over-year. As such, the blogger bets the second quarter of 2018 will experience more cash use, with AMD angling for an inventory replenish. By the time the third quarter guide is released for the year, Wiggins De Oliveira could see investors understanding his case: that the company is simply not unleashing growth at a quick enough pace to make it justifiable to shell out over 200X times free cash flow and approximately 2.5 times its revenue. Wiggins De Oliveira’s bet: look out for AMD share price to fall right back down to $9, which was the trajectory spotted a few months ago. Another point of contention: the company has a history of diluting its shareholders, with the last 3 years pointing to shareholder dilution to the rough tune of around 33%.

In a nutshell, “AMD’s needs to deliver strong free cash flow over the next several quarters to substantiate its market valuation. Because once AMD’s shareholders will see its revenue slow down as it enters H2 2018 and offers investors full-year guidance at its Q2 2018 earnings call, investors might start to question why they own the company,” concludes Wiggins De Oliveira.

According to TipRanks, which measures analysts and financial bloggers based on how their calls perform, four-star blogger Michael Wiggins De Oliveira has a 59% success rate and ranks #1,186 out of 6,494 bloggers. De Oliveira garners 4.1% in his annual returns. However, when recommending AMD, De Oliveira forfeits 13.5% in average profits on the stock.

TipRanks reveals healthy optimism circulating through the Street on the chip giant’s market prospects. Out of 18 analysts polled in the last 3 months, 10 are bullish on AMD stock, 6 remain sidelined, while 2 are bearish on the stock. With a return potential of nearly 12%, the stock’s consensus target price stands at $15.50.

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