AMD (AMD) shares were trading near $2 apiece a year ago and there was far more debate about whether the company would go bankrupt than whether it could seriously take on Intel (INTC) and Nvidia (NVDA) in their biggest markets. Things look much different now.
AMD skyrocketed by 16.3% Wednesday to close at $12.06 after the chip giant on Tuesday released the latest in a string of encouraging earnings reports that have put to rest fears of an impending financial implosion. And back in December, TheStreet's Jim Cramer argued that AMD represented one on 2017's top 10 takeover targets.
Now, it's worth remembering that AMD's breathtaking rally has had much to do with enthusiasm about products that collectively had no impact on the latest quarter -- and that are set to have just a small impact on the current one. Fortunately for investors, the chipmaker gave every indication on its earnings call that those products will deliver as advertised.
AMD reported fiscal fourth-quarter revenue of $1.11 billion (up 15% annually) and adjusted EPS of negative $0.01. The former topped a $1.07 billion consensus analyst estimate, while the latter was in line with expectations. The company also guided for revenue in the seasonally weak first quarter to be down 11% sequentially, plus or minus 3%. That implies a range of $955 million to $1.02 billion, which at the midpoint spells 18% annual growth and is above a $964 million pre-earnings consensus.
Shares initially slipped in after-hours trading following Tuesday's earnings release, but later reversed course in a big way. What the company had to say on its call about its 2017 product launches likely had something to do with this. Among other things, AMD:
- Reported securing a number of high-end PC design wins for its Ryzen CPUs, the first chips based on its next-gen Zen CPU core architecture. It also promised Ryzen, which will initially target the high-end desktop market (currently dominated by Intel) before going after the notebook and embedded markets later this year, is set to launch in early March.
- Confirmed that its Vega GPU line, which will initially target the server and high-end PC markets, will launch in the second quarter. As is the case for Ryzen, Vega will gradually move downmarket.
- Said its Zen-based Naples server CPUs are meeting its performance targets and have helped AMD expand its design win momentum in several end-markets. Naples, which will put AMD on better footing in an x86-server CPU market dominated by Intel's Xeon line, is also launching in the second quarter. AMD did caution that new server CPUs tend to ramp more slowly than PC CPUs, but said it expects "some contribution" from Naples in 2017's second half.
- Indicated high-end Ryzen and Vega chips, along with Naples, will have gross margins "well above" AMD's corporate average.
- Suggested that it expects normal seasonal growth in 2017's second half in spite of the first-half Ryzen and Vega launches.
Thanks to all of this -- along with Microsoft's (MSFT) expected late-2017 launch of a new Xbox One (code-named "Scorpio") that will feature a more powerful AMD processor -- a pre-earnings consensus estimate for AMD's sales to rise 7.4% in 2017 to $4.59 billion is looking pretty conservative. The consensus has already risen to $4.69 billion (10% growth), and it's a safe bet that many investors are hoping for an even stronger performance.
Regarding the fourth-quarter beat, that was fueled in large part by strong sales of AMD's Polaris GPUs, which have been designed into some of Apple's (AAPL) latest MacBook Pros and certain other high-volume PC lines. Nvidia still dominates the lucrative high-end PC GPU market, but Polaris, aided by its power efficiency improvements, has put AMD in much better position downmarket. And a strong PC-gaming hardware market is giving a lift to both companies.
Polaris sales, along with some PC industry stabilization and a reasonably good reception for the company's new Bristol Ridge notebook APUs (which rely on the company's older Excavator CPU core architecture), helped AMD's Computing and Graphics (CPU/GPU) revenue rise 28% annually to $600 million (better than Q3's 11% growth), with operating loss narrowing to $21 million from $99 million.
AMD's Enterprise, Embedded and Semi-Custom revenue, which is dominated by console-processor sales, grew 4% to $506 million (down from Q3's 31%), with operating income dropping by $12 to $47 million thanks to higher R&D spend. A big 2016 boost from the launch of Sony's (SNE) PlayStation 4 Pro -- which features a more powerful AMD processor than the standard PS4 -- has tailed off. However, this business should get a fresh lift later this year from Microsoft's Scorpio launch.
Regardless, it's the smorgasbord of new PC and server chips AMD is due to roll out that have markets most excited. A lot has been priced in since last winter, and the pressure is now on AMD to make good on its many promises. But the company's latest remarks, together with its recent execution, provide reasons to be optimistic.