AMD Suffers its Worst Stock Drop in Over a Decade, Despite Revenue Gains

AMD’s stock took an absolute beating yesterday in its first full day of trading since it announced its Q1 results. The stock fell by its largest percentage in 12 years, for a net drop of 24.23% during business hours. If the after-hours decline of $0.14 holds, the company could actually break the drop record it set back on January 11, 2005.

Normally we avoid any kind of stock discussion, since it’s far outside our bailiwick. But a drop this big on the back of what we previously characterized as a successful quarter deserves at least some broad discussion. To understand why investors punished AMD so harshly, it helps to understand how the stock has performed in the past year. First, here’s AMD’s stock price movement over the past 24 hours:

And now, here’s AMD’s stock price movement over the past 12 months.

One year ago, AMD stock was trading at barely a third its current level. Investors had driven the stock above $10 well before Ryzen ever launched, then pumped it higher still. AMD delivered an extremely solid quarter with Ryzen 7’s launch, but there were some aspects to the company’s performance that left investors jittery.

First, AMD burned through more than a quarter of its cash reserves in Q1 2017, from $1.26 billion in reserve at the end of Q4 to $943 million in reserve today. AMD claims that this change was driven by “timing of sales and cash collections, debt interest payments, and increased inventory.” Inventory levels did increase from Q4 2016 to Q1 2017, from $751 million to $839 million, and that’s not something that investors really like to see either. At multiple points in the past, AMD has been forced to write down the value of its inventory and taken a sizable hit for doing so.

AMD improved on many metrics in Q1 2017 compared to Q1 2016, but it wasn’t a clean sweep. Click to enlarge.

At the same time, however, inventory build-ups also happen when companies are preparing to launch new products. When Q1 ended, AMD was poised to launch Ryzen 5. It has Naples and Vega both arriving this quarter, and it’ll be working on bringing Project Scorpio up to snuff prior to Microsoft’s launch later this year. In short, it’s not surprising AMD’s inventory levels have grown, and we won’t know how ‘healthy’ that inventory mix is for at least another quarter.

The other problem (from an investor perspective) with AMD’s Q1 2017 is that the company didn’t give strong guidance on its performance for the rest of the year. It doesn’t expect its gross margins to skyrocket and its guidance of 12 percent growth in Q2 isn’t a huge upside, either. AMD has a lot of reasons to be cautious with its guidance, but investors holding a stock that’s tripled in value in a year were apparently looking for something stronger.

The disconnect between technology and investor response

The beating AMD’s stock just took is actually a really good example of how technological success doesn’t neatly correlate to how investors treat a stock. Evaluated from a technical perspective, AMD’s stock price should never have roughly tripled from May to November, 2016. Sony’s PS4 Pro and AMD’s midrange Polaris refresh were both decent products, but they weren’t a reason to triple the stock price.

This is particularly true on the graphics side of the business. Back when AMD still released GPU sales data as its own separate segment, it was easy to see how little money AMD actually made off its graphics products. In 2012, for example, AMD reported $1.417 billion in GPU sales for that year, with operating income of $105 million. Its 2011 figures were even worse. In that year, AMD sold $1.565 billion in GPUs, but only recognized $51 million in operating income. That’s a margin of 7.4 and 3.2 percent, respectively, and I suspect it actually helps explain why AMD stopped pushing the envelope on high-end GPUs for a few years — the company couldn’t afford to throw top dollar at graphics during a difficult period when revenue was low and its GPU margins were frankly terrible. The abnormally long GPU refresh cycles between Hawaii and Fury X and between Fury X and Vega may be partly a result of this.

But even if that’s not true, the larger point stands. From a technology perspective, the time to reward AMD was when Ryzen 7 launched. Investors clearly saw things differently. I unsurprisingly side with the techies most of the time, but in a case like this it’s useful to take a look at the bigger picture. At the same time, we’ll need to see how 2017 plays out to get a better handle of how robust AMD’s recovery truly is. Vega, Project Scorpio, Ryzen 5, Naples, and AMD’s upcoming APU products should collectively put the company on vastly better footing both within each market and across its entire product space. But the devil is in the details — or, in this case, the cost of goods sold, consumer response, inventory levels, and enterprise uptake.