Why AMD's soaring stock is a more important tell on the tech industry's health than Facebook's plunge
- AMD's strong sales results are a better barometer for the technology industry’s health than the company-specific issues at Facebook.
- The chipmaker sells high-profit-margin server chips to data centers and cloud computing providers, which companies use to add capacity to serve their customers.
Wall Street is buzzing over Facebook's lower profit margin guidance, driving an epic plunge in its shares Thursday.
But investors shouldn't be too concerned about whether the social media giant's disappointment will drive the rest of the technology sector lower. AMD's strong sales results are a better barometer for the industry's health than the company-specific issues at Facebook.
On Wednesday Facebook reported slightly lower-than-expected second-quarter sales and daily active user numbers. But the bigger problem was its guidance for slower sales growth for the third and fourth quarters and a dramatically reduced forecast for long-term profit margins.
Chief financial officer David Wehner said the company's operating profit margin will fall to the "mid-30s on a percentage basis" over a more than two-year period, compared with second-quarter operating margin of 44 percent.
"We're also making the significant long-term investments in safety and security. Those investments are in the billions of dollars per year. Those will have a negative impact on margins," Wehner said on the earnings call Wednesday. "We think that's the right thing to do for the business in terms of ensuring the community's safety and security and the durability of the franchise."
Facebook shares plunged more than 20 percent in after-hours trading Wednesday after the guidance. The stock closed down 19 percent Thursday to $176.26.
One Wall Street analyst believes Facebook is doing the right thing by investing to clean up and restore trust in its platform.
"This is a challenging time for [Facebook], but you have to put that into perspective … The companies that invest for the long term, companies like Amazon, tend to do much better than the companies that aren't investing heavily," Citi Research analyst Mark May said on CNBC's "Squawk on the Street" Thursday. "A lot of this is trying to control the PR a bit by showing how much they are spending to keep the regulators off their back."
While Facebook is engineering its own slowdown to fight misinformation and secure its website, AMD's better-than-expected second-quarter sales and earnings results point to broad-based strength in technology industry spending.
AMD sells high-profit-margin server chips to data centers and cloud computing providers, which companies use to add capacity to serve their customers.
The chipmaker's revenue soared 53 percent year over year in the reported quarter. AMD CEO Lisa Su said on the earnings call Wednesday the company's chip sales to data centers "increased significantly" and "saw some nice acceleration." She also added the personal computer market is "doing a little bit better than most people expected."
"We had an outstanding second quarter with strong revenue growth, margin expansion and our highest quarterly net income in seven years," Su said in the earnings press release Wednesday.
AMD's stock closed up 14 percent Thursday. Good news for the chipmaker is likely positive news for the technology industry's business trends too.