AMD was blinded by easy money, and now he pays the price – Motley's Fool

Few companies have benefited more from the cryptocurrency bubble that swelled in 2017 than Advanced micro systems (NASDAQ: AMD). The company's graphics cards were well suited to perform the calculations needed to "exploit" these digital currencies. Sales to cryptocurrency miners exploded as mania progressed, creating graphics card shortages and driving up prices.

It was not hard to see that all this was a massive and unsustainable bubble. Unless you use AMD, that's the case. The company was accelerating GPU production earlier this year, even after the collapse of cryptocurrency prices, to meet demand. But this request was fleeting and, as I had warned in "A cryptographic crash could derail AMD": "It's a strategy that will work as long as it will not work because much of it this request could disappear without a trace ".

Not only has this application disappeared, but it also has a negative impact on AMD more than expected.

Something does not matter

GPU sales categorized by AMD as being blockchain-related were negligible in the third quarter, down from the high single-digit sales in the third quarter of 2017. This sharp decline was fully anticipated. When calling the second quarter results, Lisa Su, CEO, said, "So for the second quarter, we accounted for about 6% of the blockchain's business." For the third quarter we are planning very little blockchain. "

AMD expected all cryptocurrency sales to disappear in the third quarter. And that's exactly what happened. But GPU sales were even weaker than expected by AMD. The company has blamed excess channel inventory caused by declining demand for cryptocurrency. But why would there be an excessive inventory of channels if AMD had predicted several months ago that demand for cryptocurrency would be close to zero? Because AMD has no idea of ​​the volume of its sales that is actually related to cryptocurrency.

Some AMD graphics card partners are selling models specifically for cryptocurrency miners. Asus, for example, sells a few mining models. These sales are easy to follow and can be attributed 100% to cryptocurrency.

But when someone buys an AMD Radeon RX 570 standard at Amazon and uses it for cryptocurrency mining or a mixture of mining and gaming, which is much harder to track. I do not think that AMD really masters the percentage of graphics cards sold in the usual outlets that were ultimately used for cryptocurrency extraction. If that was the case, he would not have been surprised by such a weak graphical demand in the third quarter.

AMD was expecting a decline in its computer and graphics sector revenues of about $ 50 million in the third quarter compared to the second quarter. Instead, it was down $ 150 million. "And if you look at this difference compared to the beginning of the quarter, it's only the GPU channel, we had other put options, but it's basically the GPU channel," said Su when calling the third quarter results.

AMD could have been more pessimistic about blockchain-related demand, yet it still missed the $ 100 million goal. There are two possible explanations:

1. The demand for graphics cards from players dropped a cliff for no particular reason.
2. A significant portion of the sales of graphics cards through normal retail channels during the Cryptocurrency bubble should have been classified in the "blockchain" category but was not. Now these sales are disappearing, taking AMD off guard.

The second explanation seems more plausible.

Expect more graphic weakness

AMD expects sequential growth in its graphics business in the fourth quarter, primarily due to its data center products. But since the company underestimated weak demand in the third quarter, I am not convinced that its outlook for the fourth quarter is particularly accurate.

AMD expects it to take a few quarters to process the excess channel inventory, but it will take even longer if the company still underestimates the volume of cryptocurrency demand. It may be that AMD needs to completely exceed crypto-currency sales before graphics activity returns to normal.

John Mackey, CEO of Whole Foods Market, an affiliate of Amazon, is a board member of The Motley Fool. Timothy Green has no position in the mentioned actions. The Motley Fool owns shares and recommends Amazon. Motley Fool has a disclosure policy.