AMD’s Revised Q2’15 Guidance Does Not Necessarily Confirm Its Long-Term Failure

While almost all semiconductor companies have been impacted by the continuous decline in PC sales in the last few years and are bearing the brunt of the weaker than expected PC demand so far this year, PC and graphics processor manufacturer AMD (NYSE:AMD) seems to be the worst hit. AMD’s stock has lost approximately 50% of its value in the last one year, and is down almost 15% so far this week after the company lowered its Q2 2015 guidance on July 6th. While we agree that 2015 will be a difficult year for AMD, we do not believe it is reason enough to write-off the company.

Owing to a decline in PC shipments, market share loss to Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA), as well as a late entry in new emerging markets, AMD saw its revenue base shrink in 2012 and 2013. Though the company reported a marginal improvement in its top line in 2014, as it successfully ramped up a diverse set of new products in non-PC growth markets, Q1 2015 results were disappointing, due to weaker-than-expected PC sales, market share losses and a seasonal decline in the semi-custom business. The company has not been profitable in the last three years, and its net loss increased from $20 million in Q1 2014 to $180 million in Q1 2015.

Based on AMD’s revised Q2 2015 guidance, we have lowered our price estimate for the company from  $2.90 to $2.66, and our valuation is now over 25% above the current market price.

Blaming the weaker than expected consumer PC demand, AMD now estimates a 8% sequential decline in its Q2 2015 revenue, as against it prior guidance of a 3% drop (+/- 3%). The company expects its Computing and Graphics reporting segment to be the hardest hit, while it claims that the Enterprise, Embedded and Semi-Custom (EESC) segment met its expectations in Q2 2015. It also lowered its non-GAAP gross margin guidance from 32% to 28%, mainly because EESC will have a higher proportion of sales than initially expected. AMD also expects to take a one-time charge of $33m related to the cost of transitioning some chip designs from its older 20 nanometer process to the latest FinFET node. Several of its chips currently in development were initially targeted to use TSMC’s 20-nm fabrication process, but the company has decided to move those chips over to a more advanced FinFET-based process technology instead.

AMD is working hard on its multi-year strategy to drive profitable growth by delivering next-generation technologies across the key areas of gaming, immersive platforms and data centers. It is focusing its investments on the strongest opportunities to enable its customers to create great products that push the boundaries of what is possible and allow the company to achieve profitable growth in the years to come. Though AMD has slugged away as a weak number two (to Intel in CPUs and Nvidia in GPUs) for years , it has managed to prove its strong engineering expertise on a number of occasions.

With its diversified, Intel-based and ARM-based offering, AMD is uniquely positioned to drive the thrust into the 20% market share many observers expect ARM-based microprocessors will account for in the emerging market for micro-servers. Additionally, the PC gaming segment looks promising for AMD. The company unveiled its line of next-generation Radeon graphics chips at the Electronic Entertainment Expo (E3), last month. The reviews for these chips have been good so far, and could help AMD expand its footprint in PC gaming, which represents almost 40% of the worldwide gaming market. It already powers all major game consoles currently available in the market. (Read: AMD Launches Revolutionary Graphics Cards To Gain Share In PC Gaming)

The next two years are extremely critical for AMD. If the upcoming products and technologies manage to provide stiff competition to its competitors, AMD’s years of restructuring its business would finally pay-off by bringing the company back to profitability.

See our complete analysis for AMD

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