Advanced Micro Devices, Inc. (NASDAQ:AMD) stock moves higher ahead of Q4 earnings on Jan 31st. Should you buy the stock ahead of earnings?
Advanced Micro Devices, Inc. (NASDAQ:AMD) is due to report its Q4 earnings on 31st January 2016. The stock has seen a renewed uptrend going into earnings. Should you buy in? Let’s look at analyst estimates of revenue and earnings, and the recent changes in short interest before we evaluate the pros and cons of investing in AMD at this point of time.
Those who own NVIDIA Corporation (NASDAQ:NVDA) stock might also want to watch AMD’s earnings release closely. The backdrop being, commentary by Pacific Crest’s Michael McConnell in December, which suggests that GPU inventories were piling up for both AMD and NVIDIA, though the analyst focused more on the latter, as per the report by Barron’s. Going by the report, the problem wasn’t as severe for AMD, when compared to NVIDIA, which saw prices of its high-end GPUs fall by about 10%.
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AMD Earnings Q4 2016 – What Analysts Expect
Analysts expect AMD to report a non-GAAP loss per share of 2 cents, compared to a loss of 10 cents per share a year ago, and positive earnings per share of 3 cents in the previous quarter. Clearly, analysts are expecting a huge YoY improvement in AMD’s financials. On a sequential basis though, analysts expect AMD’s earnings to be lower, which may be in part due to the company’s revenue guidance for Q4.
As part of its Q3 earnings announcement, AMD issued a revenue guidance for Q4, which projected a sequential revenue decline of 18%. In Dollar terms, that would represent a revenue of $1.07 billion for the fourth quarter, suggesting that FY 2016 revenue could come in at just over $4.1 billion. Implicitly, the guidance translates to a 12% YoY growth for Q4, and a 6% growth for FY 2016, at the midpoint of the guidance. Analyst estimates for Q4 are in line with the company’s guidance, with the consensus estimate at $1.07 billion.
In spite of a shaky start to 2017, which brought the stock down from as high as $12.42 to as low as $9.42, AMD stock has moved back higher in the last few days. The stock closed Jan 26th at $10.52 a share. What’s interesting is that the recent correction doesn’t seem to have triggered a huge pile up in short interest. Based on the latest short interest data as of Jan 15th, which became available on 25th Jan, short interest rose by a modest 2.3%. That’s encouraging, given the rally the stock has delivered in Dec 2016, and in the entire year for that matter.
What AMD Has Going For It
Advanced Micro Devices, Inc. (NASDAQ:AMD) got off to a great start in Q4, announcing a partnership (1) with Chinese e-commerce giant Alibaba Group Holding Ltd (NYSE:BABA), to put its GPUs in Alibaba’s cloud servers. AMD followed that up with a deal with Alphabet Inc (NASDAQ:GOOGL)’s Google in November, to mark its entry into the deep learning space. And as things stand, the deal could be the first of many for AMD. Much of the current excitement though, is built around the big opportunity in AMD’s upcoming Ryzen line up of CPUs, which are expected to give Intel Corporation (NASDAQ:INTC) chips a run for their money. That’s expected to be followed by AMD’s equally awaited Vega GPUs, which could also give arch rival NVIDIA Corporation (NASDAQ:NVDA) a tough time (2).
Exactly how much market share these products help AMD gain remains to be seen. However, as AMD CEO Lisa Su puts it, sometimes, it’s good to be the ‘smaller guy’. AMD has its work cut out right now. Even though initial reports suggest that AMD’s products could end up being quite a threat to rival CPU and GPU offerings from Intel and NVIDIA Corporation (NASDAQ:NVDA), in reality, AMD doesn’t necessarily need to blow the competition away. What it does need to do, is put out products that are competitive, at reasonable prices, and the company shouldn’t have a very tough time eating into its rivals’ market share in the CPU and GPU markets.
AMD’s move to restructure its long-term debt was a great one, and it should benefit AMD financially in 2017. However, you probably won’t get to see any of that this quarter, since the costs associated with pre-payment of retired debt, and restructuring costs, including those incurred to issue fresh debt, are likely to offset the benefits in Q4 2016, and Q1 2017. Most of the other positive catalysts we discussed above are also likely to kick in this year. So, AMD’s guidance for Q1 may be of more interest to investors during this quarter’s earnings announcement, rather than the numbers for Q4 itself.
Follow Advanced Micro Devices Inc (NASDAQ:AMD)
Follow Advanced Micro Devices Inc (NASDAQ:AMD)
Summing It Up
Advanced Micro Devices, Inc. (NASDAQ:AMD)’s projections indicate a 12% YoY revenue growth in Q4, which is also what analysts are expecting the company to deliver. AMD stock does look set for a good run as the year unfolds, with the launches of its Ryzen CPUs and Vega GPUs lined up. The company’s partnerships with Alibaba and Google are also likely to kick in this year, as are the benefits of debt restructuring. However, given how high the expectations are right now, even a slight disappointment could trigger a sizeable correction following AMD’s earnings release on 31 Jan 2017.
Another risk comes in the form of Intel’s plan to launch its third generation Xeon Phi processor, Knights Mill, which it claims can eliminate the need for GPUs in the artificial intelligence and deep learning space. In fact, Intel has already signed a deal with Baidu, which hitherto powered its deep learning models with NVIDIA GPUs. That said, it may take Intel some time to change the dynamics drastically in this space. If you’re a risk-averse investor, you might want to stay out of AMD stock going into earnings. If you don’t mind volatility and risk though, AMD looks like a good opportunity to potentially beat the market this year.
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