Analyst On Advanced Micro Devices: 'Margins Not Ryzen'

Advanced Micro Devices, Inc. AMD shares are slumping in pre-market trading following the release of its first-quarter results after the market close Monday. Ahead of the results, the stock was up 20.11 percent in the year-to-date period.

Commenting on the results, Oppenheimer said margins are hurting the stock, not the recently launched Ryzen processor.

Earnings Undoing Stock's Fight Back After Goldman Downgrade

In early April, Goldman Sachs issued a Sell rating on the shares of the company, according them a $11 price target.

Although the stock managed to fill in the Goldman gap by moving to $13.62, the negative reaction to earnings could pull the stock lower toward Goldman's price target. On the downside, the stock could seek out near-term support around $12.76. Further supports are found around $11.5 and around its 200-day simple moving average, which is currently at $9.7.

Q1 Recap

Analysts Rick Schafer and Joshua Buchalter noted AMD reported in-line first-quarter sales of $984 million and loss per share of $0.04. The second-quarter revenue guidance of 17-percent sequential growth, translating to revenues of $1.15 billion was just ahead of the consensus estimate, the analysts added.

Among Other Metrics

• Q1 gross margin: Up 130 basis points year-over-year to 33.6 percent.
• Q2 gross margin guidance: Down 60 percent sequentially.
• FY17 revenue guidance: Up in low-double digits Vs. previous guidance of annual growth.
• FY17 capital expenditure raised by $60 million to $140 million due to the management's decision to capitalize mask costs.

The analysts believe investors would be disappointed with the second quarter gross margin guidance despite the better mix, including a full quarter of Ryzen and initial Vega shipments in the second quarter.

Oppenheimer pointed out investors were hoping a full quarter of Ryzen would offset the seasonal shift toward lower margin Enterprise/Embedded/Semi-custom. The firm thinks Ryzen is priced aggressively to spur demand, limiting GM leverage, at least initially.

Segments

• Computing/Graphics: 50 percent sequential drop, which the firm termed as better than seasonal, and 29 percent year-over-year growth.
• EESC (accounting for 40 percent of the total revenues): Up 5 percent, marking the third straight quarter of year-over-year growth, helped by gaming console shipments from Sony Corp (ADR) SNE and Microsoft Corporation MSFT.
• The Ryzen 7 rollout proceeded largely as expected in March, with Ryzen 5 following in early April.
• Vega GPUs are expected to launch in the second quarter in hopes of gaining some high-end share from NVDA, where AMD currently lacks any significant share.

Raising Estimates

Oppenheimer raised its near-Street-low calendar 2017 and 2018 estimates. The 2017 revenue estimate was raised to $4.7 billion from $4.5 billion and bottom-line estimate was raised to a profit of $0.01 from a loss estimate of $0.08. The firm raised its 2018 revenue estimate to $5.1 billion from $4.9 billion, while it now looks for earnings of $0.15 compared to its previous estimate for a loss of $0.10 per share.

On The Sidelines

"While the initial Ryzen roll-out appears to be progressing as expected, we believe Naples server CPUs remain a 2018 story, and Vega a wild card against incumbent Intel Corporation INTC and NVIDIA Corporation NVDA respectively, limiting NT upside," Oppenheimer said.

"With GM progressing slower than expected, we see limited EPS leverage in the model, keeping us on the sidelines."

The firm expressed doubts over whether AMD will be able to secure large enough share gains against Intel/Nvidia to allow meaningful and sustainable profitability over the foreseeable future.

Oppenheimer has a Perform rating on the shares of AMD.

In pre-market trading, shares of AMD were plunging 13.07 percent to $11.84.

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