The Recent Drop in AMD's Stock Price Is an Overreaction

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Shares of Advanced Micro Devices (NASDAQ: AMD) have taken a  beating in recent trading sessions, with the stock down 21% since Oct. 23. First, a negative analyst note from Citi Research dented investor confidence going into the company's third-quarter results. Analyst Christopher Danely slapped a $5 price target on the stock that closed Oct. 23 at $14.10 and reiterated his "sell" rating, citing intense competition after the recent launch of Intel's (NASDAQ: INTC) eight-generation processors.

Then, investors pressed the panic button despite AMD's terrific quarterly report and consensus-topping guidance on Oct. 24 , sending the stock down more than 13% after the results were released. This makes it evident that investors are having second thoughts about the chipmaker's ability to deliver growth in the face of increased competition from the likes of Intel and NVIDIA, who have released new chips to arrest AMD's rise.

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But a closer look makes it clear that the recent stock price crash could be an opportunity in disguise.

Intel's Coffee Lake Could Hit Speed Bumps

According to Citi Research analyst Danely, as reported by CNBC, Intel's latest Coffee Lake CPUs (central processing units) have extended its technology lead. That makes sense as the latest Intel processors pack six cores, up from four in the previous generation, and are built on Chipzilla's third-generation 14nm technology.

More importantly, the Intel processors are reportedly beating Ryzen, according to some third-party testing, but there is a twist. The Coffee Lake chips aren't compatible with existing Z270 and Z170 motherboards, so users will have to upgrade their chipsets to run the new processors.

This is the case because the new Coffee Lake processors could outperform the Ryzen chips only with the help of extra power from a newly designed motherboard socket. In case a Coffee Lake processor is run on an older motherboard, users won't be able to exploit the full potential of the new CPUs.

This could be an obstacle for Coffee Lake sales as Intel is expected to launch the first batch of its Cannon Lake processors in June or July of 2018 and these will be based on the 10nm technology, so they are expected to deliver a massive jump in performance and reduce power consumption substantially thanks to a smaller die size.

Therefore, the potential launch of Intel's next-generation platform within a year of Coffee Lake, as well as the lack of backward compatibility with existing chipsets could hurt its adoption. That's good news for AMD investors. Moreover, the competing Ryzen processors undercut the Coffee Lake lineup on pricing, so it is too early to say if Intel can put a stop to AMD's juggernaut in the CPU space.

AMD's latest results had good news

Danely also said -- in a note that came out before AMD reported its latest earnings -- that AMD is losing money despite the launch of new products this year. But the company's third-quarter results indicated otherwise. The chipmaker posted GAAP net income of $71 million as compared to a huge loss of $406 million last year, driven by an increase in sales of its GPUs and CPUs in the premium desktop market.

More specifically, AMD saw a spike in the average selling prices of both CPUs and GPUs last quarter, and this led to a 4-percentage point increase in the company's gross margin. Furthermore, the chipmaker's operating margin shot up 4.1 percentage points year over year even as operating expenses increased 18%.

So the statement that AMD's latest products aren't helping the company make money doesn't hold water anymore. Looking ahead, the chipmaker could post sustained profits thanks to a spike in CPU sales.

Moreover, AMD has just started shipping its notebook-centric Ryzen CPUs, with full deployment expected by the first quarter of next year, so it has another avenue to grow its market share.

Danely's $5 price target for AMD stock doesn't make much sense as its revenue and earnings are expected to get better. The company has raised its full-year revenue guidance and AMD is expected to report non-GAAP earnings of $0.13 per share this year, which could increase to $0.35 per share in the next fiscal year, according to analyst estimates.

AMD's earnings expansion depends on its ability to keep snatching market share from rivals. It has been making the right moves in this regard by scoring wins in NVIDIA's stronghold, and is touted to win share from Intel in the server market post the launch of its EPYC chips. Finally, AMD's latest quarterly report is proof that the company's new products are delivering results. Investors should stop panicking.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.