In contrast to last quarter's expectations miss, AMD beat and raised vs. consensus numbers, though their full year guidance was largely in line with Morgan Stanley numbers. Fundamental progress has been impressive but Morgan Stanley does not see earnings growing into the stock price, and Morgan Stanley maintains a cautious view.
For the last twelve months, Morgan Stanley has been in the unusual position of being well above consensus on EPS, while being cautious on long term prospects for the stock (though Morgan Stanley did upgrade the stock to EW late last year as Morgan Stanley realized there was too much enthusiasm to maintain its negative view before the products came out).
Sell side numbers had not really given AMD any credit for the impressive product pipeline, while at the same time sell side bulls qualitatively gave credit to AMD for optionality scenarios that Morgan Stanley considers to be unrealistic. Morgan Stanley admires what AMD has accomplished on the microprocessor side on a shoestring budget. But Morgan Stanley thinks it takes several quarters for AMD to establish credibility even in the desktop market and several more quarters to establish credibility in the server market and each one of those quarters Intel moves forward.
Meanwhile, the company's spending has been depressed of necessity and Morgan Stanley has felt (and are now seeing) that opex needs to rise at least as fast as revenue growth as prospects recover. Morgan Stanley is still above AMD's forecast for 2h17 and ahead of the street for next year, slightly. But as Morgan Stanley moves deeper into these product ramps, the street is catching up quickly. And at $0.32in EPS for next year, the only rationale for the stock price at current levels is that 2018 represents the beginning of a multiyear revenue ramp back to 2006 market share levels, which in Morgan Stanley view gives Intel no credit for being able to compete effectively despite migrating to 10 nm in 2018. Even in 2h17, Intel will become more competitive, with a 15-20% performance boost in desktop and a material jump in server performance with Purley.