Loop Capital On AMD's Q3: Lack Of Transparency Was A Concern

One of the biggest issues with Advanced Micro Devices, Inc. AMD's third-quarter earnings report and fourth-quarter guidance was a lack of transparency, according to analysts Loop Capital Markets.

AMD managed to report another beat due to a ramp of new products and strong performance in game consoles, analyst Betsy Van Hees wrote in a report. Looking forward to the fourth quarter, the company's revenue guidance calling for a decline of around 15 percent quarter-over-quarter was "solidly" better than what the Street had expected. The revenue also implies a pro forma EPS of around 5 cents per share in the fourth quarter, which represents a 1-cent beat versus consensus estimates.

While this all sounds encouraging, the quality of AMD's third-quarter beat is "unclear" since a portion of its revenue was derived from a one-time IP revenue deal, the analyst said. It's not known what contribution this played in the beat. The company's margin guidance of 35 percent is also a disappointment given expectations for a more favorable sales mix away from semi-custom SOCs towards more gross margin rich CPU and GPUs products.

Looking forward, uncertainty surrounding revenue contributions and gross margin expansion implies the stock should trade at a discount to its peers. Specifically, the analyst's $13 price target (down from $14) is calculated on a 2.7x EV/2018 revenue estimate, which is below the blended peer group average of 4.7x.

Van Hees maintains a Hold rating on AMD's stock.

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