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Why Shares of Chipmaker AMD Jumped Another 16%

Feb 01, 2017

Advanced Micro Devices had quite a turnaround last year, but if the reaction to the chipmaker's fourth quarter earnings is to be believed, the party is still going strong.

Shares of AMD, which had already risen more than fivefold since last February, jumped another 16% to over $12 on Wednesday after the company reported revenue for the fourth quarter and expected revenue for the first quarter above what analysts had expected.

CEO Lisa Su has slashed costs to limits losses and focused on new products that will appeal to growing parts of the market, such as the high-end PC and graphics chips for video gamers and chips that can perform many calculations in parallel for machine learning and artificial intelligence tasks.

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The fourth quarter results showed that AMD's current line is already showing growth, with further gains likely when higher-performing new products hit the market in coming months. Apple (aapl) is among those using a mobile-optimized version of AMD's current Radeon in its newest laptops, the revamped MacBook Pro, for example. Quarterly revenue of $1.11 billion was 15% higher than last year and beat the $1.07 billion analysts expected. And an adjusted net loss of one cent per share matched analyst estimates and marked an improvement from a 10-cent loss in 2015's final quarter.

Like Intel (intc) and others PC suppliers, AMD benefitted from stronger-than-expected holiday sales of computers.

Now analysts and investors are looking forward to Su's new product lines succeeding. A new processor aimed at PCs called Ryzen arrives in early March and a graphics and machine learning chip family called Vega is supposed to follow in the second quarter. After 17 PC makers showed products at CES with new AMD chips, Su told analysts that Ryzen will have "widespread system and channel availability expected on day one."

Both lineups will sell for more than current-generation AMD (amd) chips and provide richer profit margins. But both face strong competition from the top-performing chips produced by Nvidia (nvda) and Intel.

"With a much more healthy overall company and stronger management team now well established in their roles, 2017 sets up as a critical year for the company," analyst Matthew Ramsey at Canaccord Genuity wrote on Wednesday. The new product lines "should all yield materially higher gross margins versus today’s offerings."

For more on Su's strategy, watch:

"As expectations (and the shares) have been rising steadily investors are going to want to see the fruits of the company’s labors translate into meaningful financial upside at some point soon," he wrote. "Maybe it can happen (we would like to believe it could), but it still requires a leap of faith we’re not quite prepared to make."Some analysts were less convinced that Su can pull it off, however. Stacy Rasgon at Bernstein Research says it will take up to a year to know if the new products are doing well enough to justify the skyrocketing stock price.

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