Despite posting 6.7% revenue growth and beating estimates by more than 5%, shares of AMD took a pounding, falling as much as 17% following the announcement last week. This is not something that you would ordinarily see for a tech company, especially given the fact that management guided for 22% third-quarter growth, which exceeded expectations.
The reason for the decline was that despite the growth projections, margins for the new gaming consoles were 50% below Street estimates. AMD guided for 10%, while analysts were looking for 20%. Again, this was precisely what I pointed out more than two months ago -- games were not going to be enough, and margins weren't going to be there.
Today, the story has not changed, and the stock is down more than 20% since Friday. Given the company's lack of competitive leverage I can't (in good conscience) recommend these shares. If the PC industry makes a miraculous recovery, then I'll reconsider. But even during the PC boom, AMD was fighting Intel (INTC) and NVIDIA (NVDA), which, in my opinion, remain better buys today than AMD. I maintain my 12-month price target of $3.50 on these shares, which is 5% lower than where the stock is trading today.
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