AMD Shares Pull Back; Jefferies Says Buy The Dip

Following a a 10-percent drop in Advanced Micro Devices, Inc. (NASDAQ: AMD) in reaction to its third-quarter results, Jefferies recommended investors to buy the dip. The firm reiterated its Buy rating and $19 price target.

Giving his key takeaways, analyst Mark Lipacis noted revenues were 900 basis points above consensus, while fourth-quarter revenues were guided 450 basis points below consensus. The analyst attributed the negative stock reaction to the flat fourth-quarter gross margin guidance and concerns on cryptocurrency revenues.

Countering the concerns, the analyst said he expects gross margins to increase 160 basis points, excluding licensing, and 260 basis points, including mix, in the fourth quarter. Additionally, the analyst expects Vega gaming CPU growth in the fourth quarter to offset weakness stemming from cryptocurrency decline, if any.

Jefferies said sales of $1.64 billion and earnings per share of 10 cent sper share were above the consensus estimates. The firm noted that C&G grew 74 percent, thanks to strong sales of Radeon graphics and Ryzen desktop processors.

However, Jefferies noted that EESC declined 1 percent due to lower semi-custom sales, slightly offset by IP-related revenue and the initial ramp of EPYC server sales.

AMD's sales outlook imply revenues of $1.397 billion, 450 basis points above the consensus, as new products continue to ramp.

Jefferies believes 80 percent of the $160 million sequential increase in C&G was from graphics, with the remaining 20 percent coming from Ryzen desktop microprocessor. The firm estimates 60-80 percent of the graphics growth came from cryptocurrency, which would mean $75 million to $100 million of revenue growth or 6-8 percent of sequential revenue growth for the quarter.

Given that mining GPUs increase with cryptocurrency pricing, the firm thinks AMD's estimate for consumer cryptocurrency sales to level in the fourth quarter appears conservative.

"We view blockchain and cryptocurrency mining as a longer term growth driver for AMD," Lipacis said.

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