AMD Falls After Disappointing Earnings

When a stock drops 11 percent after hours after reporting a revenue beat and inline EPS, it's a bad day for an AMD AMD executive.

The company reported EPS of $0.06 per share—in line with analyst estimates. Revenue was $1.59 billion—a beat over analyst consensus of $1.54 billion.  The company even reported that sales jumped 38 percent year over year. Why does that equate to an 11 percent drop in the stock?

Earnings watchers know that there are three headline numbers and AMD is getting dinged on the third—guidance. The company said that it expects sales to drop 16 percent sequentially, roughly in line with seasonal patterns.

Additionally, CEO Rory Read said, "Our focus in 2014 is to deliver revenue growth and profitability for the full year by leveraging our differentiated IP to drive success in our targeted new markets and core businesses."

Related: Some of 2013’s Best Performing Stocks Look Good for 2014

In a bull market, where Wall Street expects larger than nominal growth, the 16 percent along with a less than lofty goal from Read sent investors running. Then there’s the margins. Its reported margins of 35 percent are in line with guidance but down 100 bps quarter over quarter and 400 bps year over year. Estimates are for that number to remain the same in the first quarter.

Other metrics look like this:

It’s Computing Solutions, which includes PC and server CPUs, fell nine percent Q/Q on the back of a 13 percent year over year drop in the third quarter. This looks particularly bearish when compared to Intel’s flat PC CPU sales in Q4 and server CPU sales up eight percent.

Graphics and Visual Solutions sales were up 29 percent Q/Q and 165 percent Y/Y because of the Xbox One and PS4 orders.

R&D spend was down six percent Y/Y to $23 million, largely because of job cuts that took place last year.

Is AMD a 'buy on the dip' stock or is this the start of a downward trend? The 11 percent after-hours drop takes it below its 50-day moving average of $3.74 and one cent above it’s 200 day moving average of $3.69.

Looking back one quarter, the stock reported results that disappointed investors who bid the stock lower only to see buyers pour in that pushed the stock higher than its post earnings level. Waiting a few days to see if it holds its major levels is well advised but if it does, and starts to move higher, history may be repeating itself.

Disclosure: At the time of this writing, Tim Parker had no position in the companies mentioned.