Why AMD’s stock plunged 24 percent

Market Watch reports that it’s the biggest one-day loss for the company since January 2005.

Posted May 2nd, 2017

After the markets closed yesterday, Advanced Micro Devices announced what should have been good news: that its sales and profit for the first quarter were largely in line with what the company had promised.

Not only that, but sales had increased 18 percent, and the company’s quarterly loss had narrowed to $38 million. 

And yet, its stock plummeted 24  percent today, the biggest one-day loss for AMD since January of 2005, according to MarketWatch.  It closed at $10.32. 

Investors were largely reacting to signs that AMD’s new family of microprocessors, which offers similar performance to rival Intel, weren’t going to be able to deliver the type of returns they were expecting.

In particular, a lot of Wall Street analysts were disappointed over about gross margins, which means sales, minus the cost of goods sold. It’s different from profit because it doesn’t subtract administrative expenses.

The company had said that its gross margins would be about 33 percent next quarter, which is roughly the same as its margins in the first quarter. Analysts wanted to see that number get bigger. 

“AMD’s investments are holding back meaningful margin expansion and profitability,” wrote J.P. Morgan financial analyst Harlan Sur in a research note to clients. 

There’s also a lot of hype baked into AMD’s stock price. 

Ralph Barrera/AMERICAN-STATESMAN STAFFAMD President and CEO Lisa Su announces Ryzen at a launch event in East Austin Tuesday afternoon December 13, 2016.

The stock rose a meteoric 575 percent from the end of February 2016 to February 2017, mostly based on excitement over the company’s new line of computer processors.

Those computer processors, called Ryzen, were released in March. The company did partially attribute its double-digit sales increases to Ryzen, and its graphics processors.

But expectations were a lot higher for how much Ryzen, and the company’s new graphics processor, called Vega, could boost sales and profit going forward.

As MarketWatch reports, one analyst said AMD needed to have a “near perfect” quarter to justify any more increases in its stock price.  

Here’s what Fortune magazine had to say about it:

Longtime chip industry analyst Stacy Rasgon at Bernstein Research explains that investors have pushed up the stock price betting that Ryzen will be a hit and help boost profits, especially as higher-end models destined for servers hit the market. So they were disappointed that AMD's guidance for the year said that sales will increase only by a "low double digit percentage" and adjusted gross margin will improve by an unspecified amount, with no improvement seen in the upcoming second quarter.”

Still, other analysts said they were still believers in the AMD turnaround story. 

BMO Capital Markets analyst Ambrish Srivastava said in a note to clients that he wasn’t a fan of “being unpleasantly surprised” by changes in capital expenses and increases in inventory. 

“However, we are going to be patient, as we believe the company’s explanation behind most of the deltas,” he wrote. “We see the roadmap turnaround on track,” he said. He has AMD at a price target of $15 a share.

Another analyst titled her report to clients “Not Throwing in the Towel Yet.” Betsy Van Hess, with Loop Capital, said she was sticking with her buy rating, and actually increased the price target to $13 a share. 

“We don’t think it’s prudent to downgrade the stock ahead of AMD’s analyst day on May 16,” she wrote.

There’s still a lot that is unknown about how much Ryzen, and its new graphics chips, will help the company going forward and whether the company will be able to gain market share.  

Next quarter marks the first time full quarter that the company includes sales of Ryzen products as part of its financial report. Barring a disastrous earnings report for its second quarter, don’t expect the same stock gyrations. In stock market psychology, being freed from high expectations can be a good thing.