Why AMD Shares Just Dropped 20%

May 02, 2017

"We are the music makers, and we are the dreamers of dreams," Willy Wonka tells a misbehaving child in the iconic movie version of Roald Dahl's children's classic.

It could be stock market investors want to impart a similar message—originally written by the British poet Arthur O’Shaughnessy—with Advanced Micro Devices and its CEO, Lisa Su.

Su has sold investors on her strategy of crafting a whole new family of microprocessors, dubbed Ryzen, which can compete with products from Intel in both PCs and servers. A new graphics chip to compete with Nvidia and deal to license intellectual property in China were also to be contributors. The stock rocketed from less than $2 a share to a peak of $15.55 in just 12 months between February 2016 through February 2017.

But ever since, Wall Street has grown wary that Su might not be able to deliver the goods, and the stock had slid to $13.62 ahead of Monday's first quarter report.

The report was perfectly fine—at least for the first quarter. But Su didn't provide the kind of exciting forecast for the rest of the year, especially regarding profit margins, which Wall Street's biggest optimists were seeking. AMD shares plunged as much 20% in morning trading on Tuesday. So much for the music makers. Or as Wonka wryly observed when another misbehaver fell into his chocolate river: "The suspense is terrible. I hope it’ll last."

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Longtime chip industry analyst Stacy Rasgon at Bernstein Research explains that investors have pushed up the stock price betting that Ryzen will be a hit and help boost profits, especially as higher-end models destined for servers hit the market. So they were disappointed that AMD's guidance for the year said that sales will increase only by a "low double digit percentage" and adjusted gross margin will improve by an unspecified amount, with no improvement seen in the upcoming second quarter.

"Unfortunately AMD has not yet provided investors with the inflection point that many have been hoping for as the story begins the transition from hopes and dreams to reality," Rasgon wrote in a report on Tuesday morning. "The stock (after the strong run) likely needs perfection to continue the trajectory, and while last night's results were not necessarily disastrous, they certainly weren't perfect."

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