Advanced Micro Devices (AMD) shares fell about 5% in afternoon trading yesterday as the chip maker disappointed investors by lowering its earnings forecast for the year. Its shares fell more than 4% in pre-market trading. In fact, AMD dropped nearly 8% in the trading session at 10:20 AM ET. AMD closed 1.16% higher at $ 33.87 on July 30. YTD (year to date), AMD rose by about 22.6%. By comparison, the S&P 500 is about 20.2% of YTD.
AMD managed to beat Wall Street's second-quarter earnings forecasts, though its earnings were almost in line with analysts' expectations.
Briefly, AMD's second quarter results
AMD delivered an adjusted EPS of $ 0.08 in the second quarter, according to forecasts. However, its profit fell by 42.8% year-on-year (year-over-year). The lower revenue and operating revenue under pressure weighed on AMD's revenue. Revenues of $ 1.53 billion were slightly ahead of the consensus estimate of $ 1.52 billion. However, its revenue fell 13% year-on-year due to poor performance in both segments. Meanwhile, sales of PC-related products improved in the quarter.
The company reported a 13% decline in revenue in the Computers & Graphics segment during the quarter. The increase in GPU sales for the client processor and data center has been overshadowed by a decline in its GPU sales. Enterprise, Embedded and Semi-Custom segment revenue fell 12% year-over-year due to lower semifinished product sales.
However, AMD's adjusted gross margin increased four percentage points on an annual basis to 41% from 37%, driven mainly by sales of Ryzen and EPYC processors.
AMD lowers its revenue targets for 2019
AMD expects its revenue to be around $ 1.8 billion, up 9% year-over-year in the third quarter. This revenue growth is likely to come from Ryzen, EPYC and Radeon sales. The company also expects its gross margin to be around 43% in the third quarter.
The company lowered its revenue guidance for 2019. It now expects its revenue to grow by an average of a single year. Earlier, the company expected high single-digit sales growth for the year. AMD slightly raised its gross margin expectation to 42% for 2019.
Analysts expect AMD sales for 2019 to grow at a slow pace year on year. AMD's revenue is also expected to grow 5.0% year-on-year in 2019, up from 21.5% year-on-year in 2018. However, sales are expected to improve in 2020 with growth of 24.1 % annually.
Reasons for poor revenue forecast
AMD blames a downturn in demand for console game chips for lowering its revenue forecast. The company is now expecting lower-than-expected orders for gaming console chips from its key customers, including Microsoft (MSFT) and Sony (SNE). According to Bloomberg, Microsoft and Sony are planning to replace the current versions of their Xbox and PlayStation consoles, respectively, which thus weighs on gaming consoles.
The worse-than-expected decline in China and lower sales of semi-finished chip products could also put pressure on its revenue this year.
AMD strives to beat Intel
In the second quarter, AMD introduced its 7 nm (nanometer) Ryzen 3000 series processors (CPU) and next-generation EYPC server processors. The Ryzen 3000 AMD series has released a new processor, the Ryzen 9 3900X, which reports that it delivers 14% better single-threaded performance and 6% better multi-threaded performance over the competing Intel (INTC) 9920X. Other Ryzen 3000 series processors include two Ryzen 7 and two Ryzen 5 CPUs. AMD plans to launch the processor in Rome in the third quarter, while Intel's 10 nm server processor will not start before 2020.
AMD has also signed a multi-year partnership with Samsung Electronics. The company will receive license fees and a license to license its Samsung graphic technology for use on mobile devices and smartphones.
Last week, Intel also released its second-quarter results, topping both revenue and revenue forecasts. It also gave optimistic guidance for the third quarter and announced the sale of its smartphone chip business to Apple iPhone maker.
Of the 35 analysts tracking AMD, 15 rated the stock as a "buy", while 18 rated it a "hold". Analysts have an average price target of $ 32.04 on AMD, suggesting a discount of 5.4% based on the closing price of $ 33.87 on July 30.