Advanced Micro Devices (NASDAQ:AMD) is down 8% after reporting first quarter earnings results, though I think the results were good enough to justify the current valuation at the very least. The current quarter was solid, and guidance also beat consensus estimates, both on the back of strong Ryzen demand.

AMD data by YCharts

For Q1 2017, AMD reported revenue of $984 million, mostly in-line with analyst estimates and up 18.3% year-over-year (“YoY”), and EPS of -$0.04, also in-line with estimates and 8 cents higher than Q1 2016. CEO Dr. Lisa Su stated the following about the results:

We achieved 18 percent year-over-year revenue growth driven by strong demand for our high performance Ryzen CPUs as well as graphics processors . . . We are positioned for solid revenue growth and margin expansion opportunities across the business in the year ahead as we bring innovation, performance, and choice to an expanding set of markets.

The revenue growth was expected to be driven by the demand and hype for Ryzen, which appears to have been the case in the first quarter. AMD’s Computing and Graphics segment saw a 29% YoY increase in sales, primarily driven by Ryzen processors and higher average selling prices for desktop CPUs and GPUs.

The outlook for Q2 appears bright as well, with AMD guiding for Q2 revenues of $1.15 billion at the midpoint, and increase of 17% QoQ and 12% YoY. Impressively, this is above consensus estimates of $1.12 billion in the quarter, making it likely that the company will report either breakeven earnings or a slight profit. AMD expects its new Vega GPU architecture to launch in Q2 along with its x86 server CPU Naples.

The latter is especially interesting as it represents a significant challenge to Intel (NASDAQ:INTC) in the server space and its line of Xeon processors. Naples had the edge in many aspects, but questions remain about exactly how performance will shape up and how much staying power the product will have once Intel inevitably fires back. This is a market with immense potential for AMD and should be watched closely by investors in both AMD and INTC.

Yet, despite these promising results, AMD is down more than 8% after hours. To provide some context, the stock is up more than 250% over the past 12 months, which I think also explains the drop. It is quite understandable that the market has extremely high expectations of AMD, and beating guidance estimates isn’t enough to send it higher after an earnings report.

With that said, we’ve seen this movie before. I wrote an article on AMD back in September as part of my Buy on the Drop? series, and rated the stock a Speculative Buy with medium risk and high reward potential after it had dropped 20% over a few trading days. That article can be read here. Back then it was just above $6 per share, less than half where it is now.

I think this earnings report demonstrated that the growth narrative is still very much on track, and investors who are still behind AMD’s product offerings should pay little mind to the short-term price movements of the stock. Naples has good disruption potential in the server space, Ryzen is selling well in the desktop CPU market, and the company’s renewed GPU offerings are keeping pace with Nvidia (NASDAQ:NVDA). The label of medium-risk, high-reward still applies as AMD have tremendous upside potential if it can overcome the risks of competing with Intel and Nvidia while also dealing with its debt load.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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