How Did AMD Turn Its Losses into Profits?

What’s driving AMD’s revenue?

In the previous part of the series, we saw that Advanced Micro Devices (AMD) is set to launch competing products in the GPU (graphics processing unit) and CPU (central processing unit) markets. The company’s growth efforts have now started to reflect in its earnings.

How Did AMD Turn Its Losses into Profits?

As seen from the above graph, AMD returned to revenue growth in fiscal 2Q16 as it won back some of the share that it lost to Nvidia (NVDA) in the discrete GPU market. In fiscal 3Q16, AMD’s revenue rose 23% YoY (year-over-year) to $1.3 billion, beating the analyst estimate of $1.2 billion.

The seasonal demand for semi-custom chips was further fueled by orders from Sony (SNE) and Microsoft (MSFT) for their upcoming game consoles. Moreover, this was the first full quarter when the sales of AMD’s revolutionary Polaris GPU were recorded.

These strengths were slightly offset by weakness in the PC and server space where rival Intel (INTC) reported strong sequential revenue growth of 21% and 13%, respectively.

Why did AMD’s stock fall immediately after earnings?

Despite strong earnings, AMD’s stock fell 6.3% a day after the earnings release, as the company reported weaker guidance for fiscal 4Q16. The company expects fiscal 4Q16 revenue to fall 18% sequentially as the seasonal demand for semi-custom chips fades.

Another possible reason for the decline in stock price is that strong sales of Polaris GPU couldn’t pull AMD’s Computing and Graphics segment out of losses, indicating that the company can bring competing products to the market but cannot make them profitable.

AMD’s stock rose on future growth prospects

If we look deeper into the guidance, an 18% sequential revenue decrease equates to $1.06 billion, which represents 11.2% YoY growth. The guidance is slightly lower than the analyst estimate of $1.07 billion. But it we look at the fiscal 2H16 revenue, the better-than-expected revenue in fiscal 3Q16 balances the slightly lower revenue guidance for fiscal 4Q16.

Moreover, fiscal 4Q16 has an extra week, which falls during the holidays when most of the company’s operations are shut down. Thus, the extra week doesn’t add to any revenue but adds on to the expense. Analysts might have added that extra week in their models while calculating revenue estimates.

The announcement of the Alibaba (BABA)-AMD partnership and the launch of Zen desktop processors in fiscal 1Q17 increased optimism among investors, and AMD stock was on the growth path again.

Next, we’ll see if AMD’s fiscal 3Q16 profits are here to stay.