Advanced Micro Devices, Inc (NASDAQ:AMD) stock is losing momentum going into the Q3 earnings.
Sunnyvale, California based semiconductor company, Advanced Micro Devices, Inc (NASDAQ:AMD) is scheduled to report its third quarter 2017 earnings on 24th of October. While AMD stock has made some gains recently, it has still to recover from post earnings sell-off after last quarter earnings. AMD stock is down by over 5% from the last quarter's earnings. AMD has had several positives in the current quarter, including GPU market share gain driven by cryptocurrency wave and very positive reviews for its EPYC servers. The question now is how should you play AMD stock ahead of earnings?
Can AMD deliver another earnings beat?
Analysts expect AMD to report non-GAAP EPS of 8 cents per share, according to Yahoo Finance. This would represent a massive 167% increase in earnings compared to the same quarter a year ago and more than 300% growth on a sequential basis. This a solid growth expectation. And when it comes to delivering on analysts estimate, AMD has missed consensus earnings estimate only in two of the past seven quarters, which is a pretty good track record. It has not missed earnings estimates in any of the recent four quarters. And if you go by the so-called earnings whisper, AMD is likely to deliver an earnings beat again in the third quarter. The current whisper number for AMD Q3 earnings is 9 cents, 1 cent higher than the street estimate.
On the top line front, AMD is expected to report revenue of $1.51 billion for the quarter, representing 15.3% growth over the $1.31 billion the company had reported in the same quarter last year and a sequential growth of 7%. AMD has a very good track record of trumping analysts estimates when it comes to the top line. AMD has not missed the Wall Street's consensus revenue estimates in any of the past seven quarters. In fact, the company has topped the high end of the analysts' expectations in all the previous four quarters, according to the Estimize database. And considering that AMD is priced for very high growth, it is imperative that it doesn't miss on the street's top line estimates in the current quarter.
Cryptocurrency continues to be a tailwind for AMD stock.
AMD has got a strong boost from the cryptocurrency miners in the current quarter. Despite being labeled as a bubble market from so many respected analysts and economists, the rally in the cryptocurrency space is refusing to fade. Just recently, bitcoin rallied past the $5000 mark, making it one of the most profitable investment (or speculation depending on whom you ask) along with its cousin Ethereum this year. This rally has kept the demand for AMD's GPU very strong.
AMD’s Radeon GPU business, therefore, still has a strong tailwind from the $150 billion global industry of cryptocurrency mining. The Radeon Vega 56 and Vega 64 video cards from Advanced Micro Devices are now the top-rated GPUs for mining Ether. The strong demand from miners and gamers has kept the demand supply equation of AMD's GPUs very tight. Barclays’ analyst Blayne Curtis recently stated that the tailwind from cryptocurrencies will continue into 2018.
AMD gained market share in GPU segment.
The sideline demand from crypto-currency miners has provided an extra boost to Vega GPUs. According to Susquehanna analyst Christopher Rolland, the Vega release allowed Advanced Micro Devices, Inc to make a 4% quarter-over-quarter GPU share gain. In addition, Vega has triggered an uptick in GPU average sales price, which was up as much as 25 percent in the quarter. Apple deal will also help AMD's GPU segment. AMD's new VEGA GPU will be included in Apple's iMac Pro.
Should you Buy AMD stock ahead of Q3 earnings?
AMD has strong track record of topping analysts estimates. Earnings whispers suggest it will deliver a beat again. So, the question is should you buy AMD stock ahead of third-quarter earnings? Well, judging by earnings reaction in the last couple of quarters, a beat is not enough to drive AMD stock higher. AMD stock had tumbled over 18% in the fortnight after its earnings on July 26th. This sell-off was in spite of AMD reporting a beat on both, top line and the bottom line. Not only that, the management's Q3 guidance was significantly higher than analyst consensus. The management guided Q3 guidance of 23% (+/-3%) sequential growth, implying revenue of $1.5 billion at the midpoint, $100+ million higher than the Wall Street consensus. However, all this was not enough to prevent a sharp fall in the stock price.
Analysts are expecting a sharp reaction in AMD stock, post-earnings. MKM Partners' Jim Strugger expects AMD stock to move by over 10.5% after the earnings. AMD stock is currently trading at more than 50x forward earnings, along with 31x book value and almost 3x sales. Hence a miss on top line could result in a sell-off. However, a strong earnings performance could lead to a short squeeze, driving AMD stock even higher. Given the expectation of sharp price movement, investors will do well not to bet on the earnings and wait for earnings to give a more clear picture.
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