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Morningstar | AMD's 3Q Results and Forward Guidance Fail to Live Up to Lofty Expectations; Shares Still Overvalued. See Updated Analyst Note from 24 Oct 2018

Following a torrid stretch of share price appreciation, AMD’s stock came back to Earth in a dizzying fashion: falling 9% during trading on Oct. 24 and another 22% during after-hours trading as lofty expectations for the firm’s third-quarter results were missed. Similarly, weaker guidance signaled AMD’s market share gains at the expense of Intel aren’t happening nearly as quickly as expected. We continue to anticipate share gains for AMD in specific areas of the PC and server markets, however AMD shares remain overvalued in our view. We are raising our fair value to $11 per share from $9 to incorporate our latest projections for no-moat AMD, though we’d steer prospective investors toward wide-moat Intel as we believe its recent sell-off is overdone and shares of the chip titan boast a very attractive margin of safety.

AMD reported third-quarter results that fell short of our expectations, with revenue of $1.65 billion down 6% sequentially primarily due to lower graphics sales. We had been modeling a steep drop-off in cryptocurrency mining-related sales for AMD, and we estimate total GPU sales fell 30% from the prior quarter. Partially offsetting this decline was strength in the computing portion of the computing and graphics segment, as Ryzen desktop and mobile products account for a larger portion of the total product mix. Enterprise, embedded, and semi-custom revenue was $715 million, down 5% year over year but up 7% sequentially. The sequential increase stemmed from higher EPYC server processor sales while the year-over-year decline was driven by lower game console demand. Gross margins rose 300 basis points sequentially to 40% due to a more favorable mix of new products and IP-related sales. Management expects fourth-quarter revenue to be up 8% year over year at $1.45 billion, with higher Ryzen, EPYC, and data center GPU sales offset by lower PC GPU and semi-custom game console chip revenue.

One of the critical factors in our outlook on the fortunes of both Intel and AMD is the misconception of AMD’s product roadmap. AMD will be sampling server CPUs for the rest of the year and likely won’t ramp production of these chips until sometime in 2019. PC chips will follow the ramp of AMD’s data center GPU and CPUs at TSMC. Consequently, we don’t believe AMD’s process node advantage (we believe Intel's 10-nanometer is more or less equal to TSMC's 7-nm in terms of transistor density) will be nearly as long as current market levels imply. We expect to receive an update on Intel’s 10-nm progress when it reports its earnings on Oct. 25.

For more insight into our thoughts on Intel's efforts in the data center and AMD's competitiveness, please see our recent report, "Concerns Over the Demise of Intel's Data Center Leadership Are Overdone."