When Advanced Micro Devices Inc. reports earnings Tuesday, the results will hold clues about how cryptocurrency mining effected graphics-chip sales, and the forecast will give indications about the effects of flaws in AMD’s other core products.
AMD AMD, +4.35% shares this year have been making up some ground lost in 2017, when rival chip maker shares skyrocketed. Gains may have been muted, though, by the January disclosure of chip design flaws that shook the industry as a whole, Spectre and Meltdown. When news of the exploits first broke, AMD played down its exposure, but has admitted that its central-processing units are vulnerable to the potential vulnerability.
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Shares were volatile following reports that a Microsoft Corp. MSFT, +1.87% software patch to address the vulnerabilities froze up AMD-based systems, so AMD will likely provide more detail about its efforts as larger rival Intel Corp. INTC, +10.55% did Thursday. Intel proved that there is life after Spectre (and patch problems), enjoying its best trading day in years Friday after showing off results from the quarter just before the vulnerabilities were revealed.
See also: Intel promises chip fix, sees no financial impact from Spectre and Meltdown
Meltdown and Spectre will not have an effect on the actual results AMD reports Tuesday, but cryptocurrency mining likely will. Analysts suggested the popularity of mining for ether, the cryptocurrency running on the Ethereum network, drove sales of graphics chips from AMD and Nvidia Corp. NVDA, +2.95% more than the companies were letting on in the fourth quarter.
As cryptocurrency mining moves from hobbyist rigs to enterprise-level mining operations, some question the future of graphics-chip demand as mining systems move toward a more software-based approach. AMD will factor any doubts about future crypto-mining sales into its forecast, along with concerns about the Spectre battle.
What to expect
Earnings: The 21 analysts surveyed by FactSet on average expect AMD to post adjusted earnings of 5 cents a share, up from 4 cents a share expected at the beginning of the quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for adjusted earnings of 8 cents a share.
Revenue: Wall Street expects revenue of $1.4 billion, according to 21 analysts polled by FactSet. That’s up from the $1.33 billion forecast at the beginning of the quarter. AMD predicted revenue of $1.35 billion to $1.45 billion, and Estimize expects revenue of $1.46 billion.
Stock movement: AMD shares are traditionally volatile after earnings, in fact, shares dropped more than 13% following solid earnings results in the September-ending quarter. Shares rallied 4.4% to close at $12.95 on Friday and are up 26% for the year, following a 9.3% decline in 2017. In comparison, the PHLX Semiconductor Index SOX, +3.26% is up 10% year this year, and gained 38% in 2017, while the S&P 500 index SPX, +1.18% is up 6.2% this year after a 2017 gain of about 20%.
What analysts are saying
Mizuho analyst Vijay Rakesh, who has a buy rating and a $17 price target on AMD, said strong graphics processing unit pricing stands to benefit AMD as well as Nvidia.
“We believe it is key to understand that pricing reflects more of a stronger GPU demand and tight GPU inventory than a pricing tailwind,” Rakesh said in a note.
A lot of that is attributed to the ether effect, and Susquehanna Financial Group analyst Christopher Rolland said that could be a problem because a lot of those sales are at a significant markup and may be artificially inflating revenue.
See also: As earnings arrive, tech CEOs have a lot of explaining to do
In a note, Rolland said “we believe a scenario exists whereby GPU sales are artificially inflated as consumers buy premium gaming cards and use them for gaming 5% of the time and mining the other 95% to recoup as much of the upfront cost as possible.”
Rolland said that after about nine months, those cards will hold significant “salvage value” for resale into the used market, which could depress prices in the future.
Of the 28 analysts who cover AMD, nine have buy or overweight ratings, 15 have hold ratings and four have sell ratings, with an average price target of $14.17, 9.4% higher than Friday’s close.