Will Advanced Micro Devices Surprise This Quarter?

Shares of Advanced Micro Devices are typically extremely volatile and are quite sensitive to news flow. This volatility stems, at least in part, from its being a very "polarizing" stock with a pretty sizable short interest. On one hand, bulls cheer the large new opportunities afforded to the company in the form of ARM Holdings servers, semi-custom, and embedded. On the other, bears expect continued market-share loss in its core PC market to more than offset any potential growth in the "new" areas.

While the intra-quarter volatility is interesting to traders, long-term investors are more interested in the trajectory of the business. With that in mind, let's look at what investors should be on the lookout this quarter, and what areas could potentially be sources of upside surprise.

Rewinding back to guidance
At AMD's most recent earnings report, management guided for revenue to increase 3% from Q1 levels, give or take 3%, which actually beat sell-side consensus at the time. Additionally, the company guided to gross margins of 35%. For the full year, AMD set the following expectations:

• Revenue growth year over year from 2013 levels.
• Free cash flow positive for the year.
• Cash balance to be maintained near the company's "optimal balance" of $1 billion, and above the target minimum of $600 million.

From that, the sell side went ahead and set the "benchmark" for the year, with consensus for the year coming in as follows:

• Full year revenue estimate of $5.97 billion, up 12.6% from the previous year.
• Full year non-GAAP earnings per share of $0.19.

However, more importantly, the sell side is expecting $1.43 billion in sales ($0.02 per share in earnings) for the June quarter and $1.56 billion in sales ($0.07 per share in earnings) for the September quarter. In particular, the guide for the September quarter will be the one to watch, as the market doesn't seem to be expecting anything too off from consensus for the current quarter.

Does AMD do better than expected in PCs?
Following PC chip rival Intel's positive pre-announcement, some investors believe that AMD may beat for the current quarter and/or guide up. Given that AMD's shares didn't really react positively to Intel's announcement, the market may not think Intel's performance will reflect AMD's.

There's good reason to think that, particularly as Intel's beat was driven by strength in business PCs, a segment where Intel has the lion's share of the market. Keep in mind, though, that AMD's exposure here is non-zero, and if AMD was able to keep market segment share here flat, then secular growth would imply a bump for AMD as well. The double-edged sword, of course, is that if Intel's surprise was driven in part by share gains, then the picture looks unfavorable to AMD. 

Is the alleged graphics-card weakness set to take a toll on the company's results?
According to Digitimes, shipments of graphics add-in boards for PCs is set to drop 30%-40% this quarter as a result of unhealthy inventory levels. Further, according to the report, both AMD and graphics-rival NVIDIA would rather reduce shipments and keep average selling prices up than cut prices to catalyze sales.

Note that according to the Digitimes report, the graphics card vendors have been aware of this inventory problem since April. Since AMD issued its guidance in April, and since AMD is known to negatively pre-announce when management expects a material miss, it's unlikely that AMD will see such a miss this quarter as a result of this alleged graphics inventory glut.

However, if this issue is real, then it may not affect GPU shipments for the current quarter but could adversely affect shipments in the coming quarter for both AMD and NVIDIA.

Foolish bottom line
If AMD is able to beat this quarter's estimate and issue a better-than-expected guide for the September quarter, then you can probably expect the shares to head toward $5 a share. However, since this stock is highly volatile (and shorted), any miss in the current quarter and/or guide could drive the shares dramatically lower.

With all of that in mind, the long-term picture is dependent on AMD's ability to stabilize and grow PC processor share, grow graphics share, and expand into new markets. It's not inconceivable that AMD's shares could trade meaningfully higher from here on strong execution, but at the same time the competitive dynamics and secular trends aren't particularly favorable.

But it's that uncertainty that makes AMD, at the very least, an interesting company to follow.