AMD Stock Craters on Morgan-Stanley Report, but Is the Report Accurate?

A week ago, AMD's stock was trading at $14.25, nearly its highest level in five years. As of this writing, the stock has fallen to $10.89, a drop of nearly 25 percent. The company has been slagged by investment analysts over the past week. While I'm not an investor and make no comment on the value of investing in AMD or any other technology company, I do occasionally write about whether specific reports are backed up by a company's roadmap or current technology portfolio.

In this latest case, a Morgan Stanley analyst named Joseph Moore wrote AMD's "fundamental outlook is not quite as robust as microprocessor momentum has been slow to build, offset by cryptocurrency gains. We believe that AMD's graphics surge has been caused by a sharp increase in sales of graphics chips to cryptocurrency miners. We expect this to meaningfully decelerate next year."

Moore went on to write(Opens in a new window) that he expected GPU cryptocurrency mining to fade out, with cryptocurrency graphics sales falling by 50 percent (costing AMD $250 million in revenue), with console sales down 5.5 percent in 2018 as well.

Looking at our Computing and Graphics segment, we made excellent progress in the Q3, as the continued success of our Ryzen family of CPUs, combined with significant graphics growth, resulted in a 74 percent increase in Computing and Graphics segment revenue year-over-year. Client computing revenue increased by a strong double-digit percentage from a year ago...Ryzen 5 and Ryzen 7 processors have ramped well in the desktop channel market, reaching 40 to 50 percent desktop market share at strategic e-tailers worldwide... In graphics, we achieved record GPU revenue in the quarter based on significantly improved ASPs and higher unit shipments from a year ago.

AMD exec Devinder Kumar later announces, "Computing and Graphics segment revenue was $890 million, up 74 percent year-over-year, primarily due to strong sales of our Radeon graphics and Ryzen desktop processors."

The mistake most people seem to be making is in assuming Devinder's use of the word "primarily" applies solely to the ramp of Radeon graphics. We have multiple pieces of information that this is not so. First, Lisa Su gives no data on how much GPU revenue has increased. She specifically does state client computing revenue (CPUs) increased by a "strong double-digit percentage." Furthermore, she states Ryzen 5 and Ryzen 7 had achieved a 40-50 percent desktop market share. That tracks with what we've been observing at Amazon since Ryzen launched; AMD continues to reliably command 6-9 SKUs in Amazon's Top 20. As of this writing, AMD holds the 2nd, 7th, 8th, 11th, 12th, 14th, 18th, 19th, and 20th spots. Prior to Ryzen's launch, AMD held two to three spots in the Top 20, and the increase we just referred to is a trend we've now been mapping for eight months. It's not a flash in the pan. For comparison, AMD has two spots on the Top 19 GPUs list, and neither belong to a Vega SKU. (One GPU slot is held by a power supply, for reasons that escape me.)

It is certainly possible a decline in cryptocurrency revenue would whack demand for AMD GPUs, but AMD has made it clear that it isn't basing its forecasts around bullish cryptocurrency demand. When asked to give details on AMD's expectations for cryptocurrency demand, Lisa Su responded: "We see Vega ramping as we go into Q4. We see that from an OEM ramp standpoint. We see that from a GPU compute standpoint. And that's offset with a little bit of leveling-off of the blockchain demand."

If blockchain demand declines in 2018, it means GPU prices will come back down out of the stratosphere and consumers should actually have more opportunities to buy these cards, while AMD's price structure should also improve as HBM2 yields and availability both rise. This may not offset the decline in revenue, but we should see at least some improvement there. And again, AMD has been clear it simply isn't leaning on cryptocurrency when it talks about its major revenue drivers in 2018.

As I've said, I don't claim to be a stock analyst and I don't know what the value of AMD's stock "should" be. But from where I sit, there's been an inappropriate emphasis on Vega as some supposed driver of AMD's profits, even though AMD's GPUs historically never did that, even during the Bitcoin boom. Here's the proof:

AMD's best year wasn't 2012 or the first half of 2013, when BTC mining was moving to GPUs, but in 2010 when Fermi was delayed until April and lower-cost cards didn't appear until the fall of that year. From 2008 to H1 2013 (before the new consoles launched) AMD's operating income on its GPUs was fractional. Sure, at the time, AMD's CPU business was even worse, but that doesn't mean the GPU division was driving huge profits or a robust return on investment.

GPUs were critical to AMD's future because they gave its APUs the graphics solution they needed to even attempt to compete with Intel, while simultaneously providing the IP that gave AMD the Xbox One and PS4 wins that kept it afloat from Q3 2013 to the present day. But evaluated in their own right, GPUs were not and have never been a major profit generator. AMD doesn't really benefit from cryptocurrency-inflated prices because AMD isn't the one selling its cards at inflated price points--that's the ODMs like MSI, Asus, Sapphire, etc.

All of the evidence suggests Ryzen is driving AMD's recovery much more so than Vega, particularly given GPUs have never been a major profit driver for the company outside of its design wins in the Xbox One and PS4. If Ryzen continues to ramp as strongly as it has, it should more than offset declines in cryptocurrency sales, especially as EPYC shipments begin. AMD may not take much of the server market in absolute terms next year, but when you're starting from zero every bit of gain is additive. Declarations that momentum has been slow to build are historically incorrect.