Third-quarter corporate earnings, particularly of technology firms, have started to show signs of stresses and strains from a challenging macroeconomic and geopolitical environment. Businesses have been under pressure primarily because of softening demand due to lower discretionary expenditure, high input costs due to inflation, and increased borrowing costs due to rising interest rates.

While the U.S. economy grew at a 2.6% CAGR in the last quarter, the Fed looks all set to match the ECB’s interest rate hike of 75 basis points during its meeting next month to fight the multi-decade high inflation.

There are increasing concerns that such single-minded hawkishness may stifle economic growth and perpetuate the supply-side issues to increase the severity of the inflation that the central banks are trying so hard to tame.

Since the headwinds affecting the economy and consequent market volatility are unlikely to abate anytime soon, we think shares of struggling businesses Advanced Micro Devices, Inc. (AMD) and Snap Inc. (SNAP) are best avoided in this earnings season. 

Advanced Micro Devices, Inc. (AMD)

AMD operates as a global semiconductor company. The company’s two segments are computing and Graphics; and Enterprise, Embedded, and Semi-Custom. It serves original equipment manufacturers (OEMs), public cloud service providers, original design manufacturers, system integrators, independent distributors, online retailers, and add-in-board manufacturers.

On October 7, the U.S. imposed export restrictions on advanced semiconductors and chip-manufacturing equipment to prevent American technology from advancing China’s military power. This follows August 31 instructions to AMD from U.S. Officials to stop exporting its top artificial intelligence chip to China. This prohibition is expected to have a material impact on the company’s sales in China.

On October 6, AMD announced selected preliminary financial results for the third quarter of 2022. The company expects third-quarter revenue to increase 29% year-over-year versus approximately 55% predicted earlier. Reduced processor shipments due to a weaker-than-expected PC market and significant inventory correction actions across the PC supply chain resulted in lower-than-expected Client segment revenue.

In the last week of September, AMD’s arch-rival, Intel Corporation (INTC), launched its 13th generation core processors, designed to put INTC in the performance lead over AMD. INTC may corner a greater share of the desktop performance market amid a slump in PC sales following massive growth during the early days of the pandemic.

AMD’s operating expenses increased 150.8% year-over-year to $2.51 billion for the fiscal 2022 second quarter ended June 25, 2022. Its operating income was $526 million, down 36.7% year-over-year. Also, its net income came in at $447 million, down 37% year-over-year, while its EPS decreased 53.4% year-over-year to $0.27 during the same period.

As of June 25, 2022, AMD’s long-term debt stood at $2.47 billion, compared to $1 million as of December 31, 2021. A significant increase in expenses incurred by the company for servicing this debt is expected due to rising interest rates.

Analysts expect AMD’s revenue for the fourth quarter of the current fiscal to decrease 12% year-over-year to $0.81. The stock has plunged 14.1% over the past month and 61% year-to-date to close the last trading session at $58.60.

AMD’s POWR Ratings reflect its poor prospects. It has an overall grade of D, which indicates a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It also has a D grade for Stability. AMD is ranked #88 out of 93 stocks in the Semiconductor & Wireless Chip industry.

Click here to access the additional POWR Ratings for AMD (Growth, Value, Momentum, Sentiment, and Quality).

Snap Inc. (SNAP)

SNAP is a global camera and social media global. The company provides Snapchat, a camera application that enables people to communicate visually through images and short videos. The company’s advertising products include Snap Ads and AR Ads.

On August 31, SNAP announced its decision to lay off nearly 20% of its 6,400 employees. SNAP’s CEO Evan Spiegel said in a statement that the company is restructuring to focus on three strategic priorities: community growth, revenue growth, and augmented reality while sunsetting several projects.

In the fiscal 2022 third quarter ended September 30, 2022, SNAP’s operating loss widened 140.7% year-over-year to $435.24 million. During the same period, its adjusted EBITDA declined 58.3% from the year-ago value to $72.64 million.

Furthermore, because of restructuring charges of $155 million, SNAP’s quarterly net loss worsened by 399.6% year-over-year to $359.50 million. This resulted in a non-GAAP net income per share of $0.08, down 52.9% year-over-year.

Analysts expect SNAP EPS for the fourth quarter of the fiscal year (ending December 2022) to decline 45.5% year-over-year to $0.12. EPS is expected to decline 72.1% year-over-year for the entire fiscal year to $0.14.

The stock has plunged 9.5% over the past month and 79.5% year-to-date to close the last trading session at $9.56.

SNAP’s POWR Ratings indicate its poor prospects. The stock has an overall D rating, equating to Sell in our proprietary rating system. It also has an F grade for Growth and a D for Momentum, Stability, Sentiment, and Quality.

Within the F-rated Internet industry, it is ranked #57 of 64 stocks.

Click here to see all POWR Ratings for SNAP.

AMD shares fell $58.60 (-100.00%) in premarket trading Friday. Year-to-date, AMD has declined -59.28%, versus a -19.07% rise in the benchmark S&P 500 index during the same period.

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.

More...