AMD’s stock witnesses its worst trading day in 12 years
In 2016, Advanced Micro Devices (AMD) stood out among semiconductor stocks (SMH), growing threefold as it announced products that would compete with those of larger rivals NVIDIA (NVDA) and Intel (INTC). In 2017, AMD’s stock rose 19% as it announced the release of its high-end Ryzen CPUs (central processing units) and Vega GPUs (graphics processing units).
AMD’s stock price growth was based on expectations of the company achieving record-high earnings with its return to the high-end market. Analysts were optimistic about the company’s growth as it expanded beyond PCs (personal computers) into the gaming and data center spaces. However, this growth was not backed by AMD’s earnings—the company continued to report losses.
The hype around new products vanished when the company reported its fiscal 1Q17 earnings on May 1, 2017. A day after the earnings release, the stock fell 24% to $10.62 in just one day. This was AMD’s largest one-day fall in 12 years. Suddenly, many analysts became skeptical about the stock’s future growth.
What caused AMD’s stock to fall?
Despite a seasonally slow quarter, AMD reported strong fiscal 1Q17 earnings that met analysts’ expectations. What shook investors’ confidence was the company’s guidance for fiscal 2Q17 and fiscal 2017.
Some analysts were expecting strong revenue growth of around 30% YoY (year-over-year) in fiscal 2Q17, the first full quarter of Ryzen sales. They expected this growth to increase to around 50% with the launch of all variants of Ryzen and Naples CPUs, Vega GPUs, and Microsoft’s (MSFT) Scorpio game console powered by AMD’s SoC (system-on-a-chip).
These hopes were shattered when AMD guided for low-double-digit revenue growth in fiscal 2017 and 12% YoY revenue growth in fiscal 2Q17. Although the guidance shows that the company is growing stronger, the growth numbers did not meet expectations.
An even bigger surprise came when AMD guided for its gross margin falling from 34% in fiscal 1Q17 to 33% in fiscal 2Q17, and for its operating expenses to increase. This guidance led many analysts to question AMD’s ability to turn its losses into profits and compete with NVIDIA and Intel in the long term while maintaining sustainable profits. The reduced margin guidance indicated that margins are stagnating instead of rising, which drove the company’s shares down 24%. In this series, we’ll look at AMD’s fundamentals and analysts’ and investors’ views on the stock.