Advanced Micro Devices (AMD) second quarter earnings hit the headline numbers, but a tempered outlook stung by slowing gaming revenue and persistent trade pressures is reeling in shares on Wednesday.
The Santa Clara-based chip maker's stock fell about 8% shortly after Wednesday's market open, curbing what had been an eye popping approximate 80% year to date gain that had largely been built on hopes of a second half rebound in semiconductor names.
The hiccup in shares comes after the company's earnings reflected a revenue slowdown hampered by growing pains in gaming and trade restrictions that persistently pressure the semi industry.
CFO Devinder Kumar told analysts that full year revenue guidance was now revised to "mid single digits", down from "high single digits" expected in April. Third quarter projections were also pared down, putting a great deal of emphasis on a strong fourth quarter.
"AMD delivered solid 2Q results but its 3Q and 2019 guidance both were reduced versus prior expectations," Deutsche Bank analyst Ross Seymore said. "To attain this guidance and the "ex-console" growth target of 20% in 2019, AMD's 4Q revs need to rise by ~20% quarter over quarter at a time when Semi custom seasonally falls."
He warned that these expectations could be too high, advising a "Hold" rating on shares as a rebound remains to be proven rather than promised.
Not Gaining in Gaming
The "semi custom" segment mentioned by Kumar and analysts appears to have been largely to blame for curbing the promised revenue rebound, as the anticipation of new Microsoft's (MSFT) Xbox and Sony (SNE) PlayStation consoles has left many potential chip purchasers saving up for the refresh.
Sales within the segment fell 12% and are expected to remain troubled into the coming quarters.
"Turning to our Enterprise, Embedded and Semi-Custom segment, revenue decreased 12% from a year ago due to lower semi-custom revenue," CEO Lisa Su said. "As we look into the second half of the year, we are seeing additional softness in game console demand, which is now reflected in our full year guidance."
She clarified that the company should be able to offset difficulty in this segment to hit its full year targets as it ramps production Ryzen 3000 CPUs of Radeon 5700 GPUs and prepares for the upcoming release of a second generation EPYC datacenter CPU on on August 7.
Su hinted that cloud gaming could help carry more demand for chips as well, though the cannibalization risk to this dynamic is still hard to determine.
China Challenge
A much more understood factor fomenting the downside pressure on AMD's guidance miss are trade restrictions that have made the semiconductor sector overall quite volatile and has particularly hurt semi names relying on the Chinese gaming market.
With about 20% of the company's revenue drawn from China and Hong Kong, there is significance room for concern.
Lisa Su noted that sans the trade restrictions and Samsung (SSNLF) impacts that the business would be largely where management expected it to be and there is room for improvement as the company gets more adept at navigating the trade environment.
"As we complete the first half of 2019, we have reached a significant inflection point for the Company as we enter our next phase of growth with the most competitive product portfolio in our history," Su told investors on a conference call late Tuesday. "We have seen some uncertainties across our supply chain driven by tariffs, trade concerns in the US entities list. In the second quarter we stopped shipping to customers added to the US entities list."
"While we remain cautious given the fluidity of the situation, the impact to date has been limited and offset by growing momentum in other parts of our business," she added. "We are executing well to our plans and see a path to significant market share gains for our product portfolio across the PC, gaming and data center markets in the coming quarters."
Yet again, this may remains a "prove it" metric for potential AMD investors.
"If you wanted to believe in AMD before last night, you likely still do following the report; at a minimum the new product ramp seems to be intact," Bernstein analyst Stacy Rasgon concluded. "But to buy the stock at $34, one presumably has to be underwriting something far above what is "currently expected," and guiding down (even if all due to consoles) isn't really a good look."
He advised that that he would remain on the sidelines until the promised inflection actually materializes and proves it can outpace Intel's (INTC) product ramps.
"Next quarter will likely be a critical test to see whether the narrative driving the shares can sustain, with a sharp inflection needed as we enter the meat of the company's 7nm product ramps," Rasgon said. "AMD's new products appear promising, but expectations have risen markedly, and 2019 outlook appears extremely optimistic."
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