AMD's weak outlook highlighted doubts about gains vs Intel

AMD's weak out look sent the company's shares tumbling about 8% on Wednesday.

The report also raised doubts on its anticipated market share gains against Intel in the second half of 2019.

Things were looking up for AMD.

Industry watchers considered the company in a strong position to gain share with its new server chip which is scheduled to roll out next month and which has gotten rave early reviews. AMD also has outpaced rival Intel on process technology.

But after AMD delivered a weaker-than-expected third quarter forecast, and lower full-year outlook, Wall Street's now wondering if those market share gains in the second half of 2019 will come to fruition.

AMD was down more than 8% at $31.05 in morning trades Wednesday after earnings. AMD said the weaker outlook was due to a softer game console market.

Intel dominates the server market, with 91% share of $5.3 billion total revenue in the fourth quarter of 2018, compared to AMD's 9.2%, according to IDC.

More doubts about AMD

Tuesday's report dampened some of the enthusiasm about AMD's expected performance in the second half of the year.

“If you wanted to believe in AMD before last night, you likely still do following the report,” analyst Stacy Rasgon of Bernstein Research told clients in a note.

AMD still appears to be on track with new products, he said. “But to buy the stock at $34, one presumably has to be underwriting something far above what is 'currently expected,' and guiding down (even if all due to consoles) isn't really a good look.”

Rasgon, who has a market perform rating on AMD, said the third quarter “will likely be a critical test to see whether the narrative driving the shares can sustain.”

Intel threw some shade on the narrative of a stronger AMD when it reported better-than-expected results and forecast. Still, both chip giants continued to face a murky data center market. An expected datacenter and cloud build out did not materialize, leading to an oversupply of server chips.

Citi analyst Christopher Danely reiterated a sell rating on AMD telling clients in a note that he expects the company's 2019 revenue to be flat year-over-year, “well below the company's guidance of mid-single digit growth.”

An upbeat view

UBS analyst Timothy Arcuri offered a more upbeat view, telling clients in a note that AMD “continues to execute very well and inch targets slightly higher as we get close to what should be a very good 2020 with new product cycles in every business segment.”

AMD reported a second-quarter profit of $35 million, or 3 cents a share, compared with a profit of $116 million, or 11 cents a share, for the year-ago quarter. Revenue fell 13% to $1.53 billion. Adjusted income was 8 cents a share.

Analysts were expecting a profit of 8 cents a share on revenue of $1.52 billion

For the third quarter, AMD said it expects revenue in the range of $1.75 billion to $1.85 billion. Analysts were expecting revenue of $1.95 billion. The chip giant also said it now expects full year revenue to grow by a “mid-single digit percent over 2018.” AMD had earlier projected high single digit revenue gain for 2019.