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AMD’s Revenue Could Rise Further, Says Moody’s

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On September 13, Moody’s Investors Service maintained a positive stance on the revenue of chip maker Advanced Micro Devices (AMD). Moody’s expects AMD’s revenue to rise significantly in the second half of 2019 and 2020. The company’s new product offerings, improved designs, and higher market share are expected to drive its revenue growth.

Moody’s has raised AMD’s corporate family rating to Ba2 from Ba3 and senior unsecured rating to Ba3 from B1. The credit rating agency has also maintained a positive outlook on AMD.

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AMD’s revenue

AMD has been posting soft revenue growth for the past three consecutive quarters on a sequential basis. However, it managed to post a sequential increase in revenue and beat Wall Street revenue estimates in the second quarter. Its Ryzen and EPYC processors, as well as its data center GPUs, added to its second-quarter sales growth. However, on a year-over-year basis, AMD’s revenue fell in the double-digits, mainly due to a decline in its graphics channel sales and semi-custom sales. Lower-than-expected semi-custom revenue related to game consoles could continue to hurt its full-year revenue.

Further, AMD also slashed its revenue guidance to a mid-single-digit growth rate YoY for the full year. This lowered revenue guidance came from a decline in the game console chip demand. Despite soft guidance, the company expects its Ryzen, EPYC, and Radeon processors to boost its revenue.

Analysts expect sales growth of 9.23% YoY in the third quarter. Meanwhile, analysts expect sales growth of 4.56% YoY in 2019. Wall Street analysts are extremely optimistic about the company’s 2020 revenue growth. They expect its revenue to grow more than 24% in 2020.

Moody’s rating agency also believes that AMD’s revenue growth will be driven by new desktop, mobile, server, and graphics chips. The rating agency expects AMD’s revenue to grow 25% YoY in the second half of 2019 on the back of new product launches. Moody’s also expects the company’s revenue growth to rise in at least the high-single-digit range in 2020.

AMD seeks to gain market share from both its rivals Intel (INTC) and NVIDIA (NVDA). It competes with Intel for CPU (central processing unit) market share and NVIDIA for GPU (graphics processing unit) market share. Therefore, it’s been relying on new product launches to stay ahead of its peers.

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New product launches act as revenue drivers

AMD has the edge over Intel, as the former is currently using 7 nm (nanometer) process nodes in its server, desktop, and graphics chips. In comparison, Intel’s supply issues related to its 10 nm nodes have delayed the 10 nm launch to 2020. AMD’s launch of its 7 nm Ryzen 3000 series PC CPU in July grabbed a huge share of the server chip market from Intel. AMD also launched Radeon RX5700X and Radeon RX5700 for desktops. Later, it unveiled its Rome EPYC server CPUs in August. Its Rome processors are in high demand from enterprise and cloud customers and could grab CPU market share from Intel.

AMD has plans to launch more products in the second half of the year. According to tech publication Techquila, it has plans to release one new 7 nm product in each month. Its Ryzen 9 3950X desktop CPU is expected to launch on September 30, followed by its third-generation Threadripper CPU line-up (extending to as many as 64 cores) in early October. Reports also suggest that Intel could also launch the Cascade Lake-X HEDT platform “Glacier Falls” soon to compete with AMD’s Zen 2 offerings.

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AMD also competes with NVIDIA in the midrange GPU segment. The launch of AMD’s 7 nm Navi-based 10 GPU (Radeon RX 5700) in July competed with NVIDIA’s GeForce RTX 2070 Super line-up. According to TechSpot, AMD’s RX 5700 charges less than NVIDIA’s RTX 2070 Super line-up for offering a similar gaming performance. AMD is also rumored to be releasing two new graphics cards—Navi 21 and Navi 23—dubbed “NVIDIA killers” in 2020.

AMD seems to have a technology advantage over Intel and NVIDIA, but we believe that it might face a price war from Intel and NVIDIA for market share.

AMD stock gaining momentum

AMD shares have returned over 66% YTD (year-to-date) despite fears of an escalating US-China trade war. Its stock has outperformed the broader market as well as its close rivals in the same period. While NVIDIA has returned 36.6% this year, Intel has gained 14.1%. Further, the VanEck Vectors Semiconductor ETF (SMH) is up about 40% YTD. The S&P 500 has gained around 20% in the same period. We believe new product launches and higher revenue growth could boost AMD’s share price higher.

AMD stock closed up 1.59% at $30.69 on September 13. The stock is trading 13.7% lower than its 52-week high of $35.55 and trading 91.5% higher than its 52-week low of $16.03. At its closing price, AMD’s market cap stands at $33.3 billion. On September 13, Intel and NVIDIA had market caps of $232.8 billion and $110.8 billion, respectively.

Overall, analysts favor “hold” ratings on AMD. Among the 38 analysts that cover AMD, 39% give it “buy” ratings, 55% give it “hold” ratings, and 6% give it “sell” ratings.

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