Advanced Micro Devices, Inc (NASDAQ:AMD) stock tanked despite a beat and a better than expected guidance.
Semiconductor company Advanced Micro Devices, Inc (NASDAQ:AMD) reported its third quarter earnings on Wednesday. The results were good on almost every front. The company reported a beat on both, the top and the bottom line. AMD's third-quarter EPS came in at 10 cents against analysts estimates of an EPS of 8 cents, a 25% earnings surprise. On the top line front, the company reported revenue of $1.64 billion, $130 million higher than what analysts were expecting the company to report. Better still, the Dr. Lisa Su led company gave a better guidance than what the market was expecting. AMD said that it expects its fourth quarter revenue to come between $1.35 billion to $1.44 billion, the lower end of which is higher than analysts' estimate of a revenue of $1.34 billion. This represents 26% YoY revenue growth.
Strong revenue growth and profit margin expansion.
Third quarter revenue represented over 20% YoY growth. AMD also reported improvement in its profit margins, both on yearly as well as sequential basis. AMD's gross margin grew from 33% in Q2 to 35% in Q3, while operating margin expanded to 7.7% in Q3 2017, compared to 2% in Q2 and (-22%) in Q3 2016. The continued growth in revenue as well as expanding margins show that AMD's financial health and the balance sheet is improving, which is a good sign. However, this strong result was not enough to prevent a massive 13% fall in AMD stock price. AMD stock is down by around 16%. So what went wrong? Why did AMD stock crash?
Why AMD stock corrected?
Well, there are few reasons for this market behavior. The fourth quarter revenue guidance represents the first sequential decline in last several quarters. Some have attributed the decline in the stock to this sequential decline. However, this guidance was much higher than the market itself was expecting. So, if this is the reason then we can expect some bounce back in next few trades. AMD also warned about the tailwind from cryptocurrency wave leveling off. Cryptocurrency miners have provided a strong boost to AMD's revenues in the past two quarters. We can't expect the same in the next quarter.
AMD stock had received a strong sell rating from Citi Research just ahead of the earnings. Citi expects AMD stock to fall to $5. Citi doesn't believe that AMD could put a dent in Intel's server market share. AMD had indicated that it could claw back as much 10% of server market share from Intel, which would have given a huge boost to AMD's revenues. It also believes that AMD's CPU market share will shrink in future due to strong competition from Intel. This report had increased the bearish sentiment around AMD stock going into the earnings.
Another reason could be its valuation. AMD stock was trading at a forward P/E ratio of above 40x. Considering that 2018 revenue growth is expected to be just over 12%, some investors are definitely concerned. If a very good news is not able to lift the stock price, it is an indication that valuation is already expensive. It could also be just that AMD stock is being AMD stock. AMD is known to be very volatile. Also, AMD stock had corrected even after the last ER, despite posting a beat on both the top and the bottom line and also the guidance was higher than expected.
Can AMD stock bounce back?
The question now is whether AMD stock can bounce back? Well, given the strong results, past stock price movements and the huge volatility in the stock, it is highly likely that AMD stock will make a comeback. AMD has improved its fundamentals and product offerings. With more than 10 major product launches this year, including Ryzen, Threadripper, Vega, EPYC, the upcoming Xbox One X and Thursday’s Ryzen Mobile, AMD has completely restructured its product portfolio. With over 16% correction AMD stock has breached the strong support from the 200-day moving average line. The 200-day moving average line had provided strong support to AMD stock in the last few months. However, AMD has a strong support at $12 price level. If the support sustains in the next few trading days, the stock could move higher from here. However, investors must remain conscious of the fact that AMD stock remains a risky bet. Given its huge volatility, it is a good stock for trading.
Looking for fundamentally strong tech stocks? Check out Amigobulls' top stock picks from the tech sector, which have beaten the NASDAQ by nearly 166%. Interested in automotive stock? Then, we also have our top picks from the auto sector, which have beaten the S&P 500 by over 299%. If you're a trader though, you should check out our daily trading ideas section for daily, free updates on the latest crossovers and other popular technical signals.