Why Analysts Are Raising AMD Turnaround Expectations Much Higher After Earnings

Advanced Micro Devices Inc. (NASDAQ: AMD) was all set to deliver a big jump or a big flop with earnings. It delivered a solid win. What was such a concern ahead of earnings was that AMD’s stock price had been up a whopping 200% from a year ago as investors are cheering the turnaround. AMD’s big plans ahead are from GPUs, servers, custom and virtual reality.

24/7 Wall St. wanted to see just how the analyst community was reacting after the earnings because they had largely been behind the curve during the turnaround. What matters is not just that price targets were raised, it is by how much, even from those firms that are still officially negative on AMD.

AMD reported revenues of $1.027 million, up over 23% sequentially and 9% higher than a year ago. This was significantly better than the midpoint of guidance. While it has a loss from operations on a non-GAAP basis, its GAAP gross margin was 31%, and its GAAP earnings were $0.08 per share on a net income of $69 million. AMD delivered a win and said that its 2016 revenue will grow in the low-single-digit percentages on a year-over-year basis. It also sees revenue increasing 18% sequentially, plus or minus 3%, and gross margin should be about 31% with $700 million or so in inventory in the third quarter.

Again, 24/7 Wall St. wanted to see what the analysts on Wall Street were saying about AMD. Many have cautious ratings, but they also largely have missed the boat, and many of those with cautious targets raised them (some handily).

Wells Fargo remains one of the most aggressive to the upside. The firm’s David Wong has an Outperform rating and raised its valuation range to $6.00 to $7.00 from a prior range of $5.50 to $6.50. Wong said:

Our valuation range is based on approximately 1.15 to 1.35x our 2017 sales estimate. We think this multiple range is reasonable given AMD’s continuing losses. Company-specific risks include the fact that AMD has yet to clearly demonstrate consistent profitability. Sector risks include uncertainty as to what long term secular growth might be.

Although AMD has substantial risks associated with falling sales and continuing losses, we think the company has valuable expertise in microprocessor and graphics circuit design.

Credit Suisse has an Underperform rating, but it raised its target to $5.50 from $3.50. Details for the rating are a strong execution versus a lofty valuation that is expensive and versus expected earnings. They were viewed as above expectations with narrower losses ahead. Credit Suisse gave six positive financial milestones (abbreviations left as is):

  • (1) 2nd consecutive quarter of Rev/EPS upside,
  • (2) y/y growth for the first time in 7 quarters,
  • (3) likely double digit y/y growth for the next 3 quarters on average,
  • (4) C2Q non-GAAP operating profit for the first time in 5 quarters,
  • (5) C3Q non-GAAP break-even EPS for the first time in 6 quarters, and
  • (6) ~$1bn of gross cash hitting their stated target for the first time in 5 quarters.

Merrill Lynch has an Underperform rating but more than doubled its price objective to $5.00 from $2.30. The firm said:

While AMD is making good progress on product roadmap and generating incremental cash flow streams through intellectual property and better gross margin products (Polaris), we note that the company appears to have no choice but to increase spending a lot more to keep pace with Intel (CPU) and NVIDIA (GPU) – i.e. there is no more room to cut operating expenses… With net-debt/EBITDA at 10x (2017) and no concrete plans yet to address debt reduction, we prefer to own Intel and NVIDIA instead.

BMO Capital Markets raised its target price to $5.00 from $4.50.

Canaccord Genuity raised its price target to $6.50 from $6.00.

Citigroup still has a Sell rating but it raised its price target up to a slightly less bearish $2.50 from the prior $2.00.

Deutsche Bank is still cautious but raised its price target to $4.00 from $3.00.

Jefferies reiterated its Buy rating and the target price was raised to $6.75 from $5.50.

Mizuho maintained its Neutral rating but raised its price target to $5.50 from $4.50.

Oppenheimer has an Underperform rating on AMD but raised estimates despite no official price target.

AMD shares traded up more than 13% early Friday to a new 52-week high of $5.93. Its prior 52-week high was $5.57. AMD shares were last seen at $5.84 on Friday, on more than triple the average daily trading volume.