AMD Earnings Q3 2015 Review: AMD Stock Is A Good Contrarian Play

  • AMD has reported yet another quarter of declining revenues and expanding losses.
  • The company's key segments, however, reported healthy sequential growth.
  • AMD might have turned a corner and the AMD stock is a good contrarian bet.

AMD (NASDAQ:AMD) has delivered mixed Q3 results where the company beat on revenue expectations but AMD earnings fell short of expectations. AMD reported revenue of $1.06 billion representing growth of 13% Q/Q and -26% Y/Y, topping consensus estimates of $995.8 million. Net loss of $197 million, or GAAP EPS of -$0.25, was considerably worse than consensus of -$0.17. AMD pinned the bigger-than-expected loss on a one-time inventory write down charge of $0.08 related to lower anticipated demand for the company’s older APUs. Gross margin of 23% was down 2 percentage points due to the said inventory write off.

AMD shares were down marginally by 0.5%, in after hours trade following the Q3 earnings call.

AMD Earnings Q3 2015: Key financial highlights

As widely expected, AMD’s PC processors sales continued on their downward spiral while GPU sales impressed. Some of the key highlights from the report were:

  • Computing and Graphics segment (combines PC processors and GPUs) is AMD’s largest revenue segment. Segment sales were up 12% sequentially but down 46% Y/Y due to lower client processor sales. AMD did not disclose revenue for the segment but said its operating loss expanded to $181 million from $17 million a year ago due to the APU write down. Client processor average selling price, or ASP, fell both sequentially and Y/Y due to lower notebook ASP. Meanwhile, GPU ASP was flat sequentially but increased Y/Y due to the company’s new GPU offerings.
  • Enterprise, Embedded and Semi-Custom segment (embedded products and server processors) was a bright spot for AMD, being the only segment to report a profit. The segment’s revenue was up 13% Y/Y but down 2% Q/Q due to lower server processor sales. Net income of $84 million was much better than the Q2 reading of $27 million but worse than the prior year period’s reading of $108 million. AMD said the healthy Q/Q sales increase was driven by seasonally higher sales of semi-custom SoCS.

CEO Lisa Su noted that Microsoft's (NASDAQ:MSFT) Windows 10 had not yet spurred much sales, as expected earlier. PC demand has remained somewhat muted. But this might change for the better since the company announced that Hewlett Packard will be using its processors in a new line of notebooks targeted at corporate customers.

The company also announced some exciting news that both Sony Corp (NYSE:SNE) and Microsoft had broadened the use of AMD’s custom chips in their respective video game consoles. Both companies’ consoles have been flying off the shelves, so this is a big plus for AMD.

Cost cutting measures

In a bid to control costs and stem spiraling losses, AMD announced that it will be selling an 85% stake of its chip fabrication plants in China and Malaysia to Nantong Fujitsu Microelectronics, and transfer 1,700 workers, or about 18% of its total workforce, to the new operations. AMD had earlier laid off 500 workers in September.

AMD also announced that it was moving to license its unlicensed portfolio in a bid to expand its revenue streams. Licensing revenue can provide predictable revenue for many years and could be a nice boost to AMD’s top and bottom lines.

The worst seems over for AMD

Judging by AMD’s latest results, it’s fairly safe to say that the tide has turned for the company and its worst days appear to be safely behind it. The company’s key segments all recorded healthy sequential growth while AMD made some key announcements that could be indicative of where the company is headed.

In particular, it’s encouraging to note that GPU ASP had increased Y/Y. I discussed AMD’s GPU business in this earnings preview where I pointed out that it was key to the company’s recovery. Barron’s had pointed that AMD had managed to grab back some market share in the lower GPU segment from archrival NVIDIA (NASDAQ:NVDA) due to Nvidia’s fumbles. Nvidia had inexplicably failed to include support for Microsoft’s DirectX 12 API called Async Compute in its latest graphic cards. This serious flaw had forced many developers to shift camp to AMD.

AMD, however, has been facing challenges in the higher-end GPU segment due to a shortage of the HBM technology that it relies on. This had led to a severe shortage of AMD’s popular R9 Fury X cards. But this is merely a temporary glitch that the company might be able to overcome in the coming months.

I would therefore like to reiterate my earlier call that AMD is a good bet for contrarian investors who are willing to ride the company’s recovery. Although the PC market is not expected to fully stabilize until 2017, the bad news has been priced into AMD stock price. A full recovery in the GPU business might be enough to trigger strong interest in the company's shares.

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