AMD Earnings: What CEO Lisa Su Has to Offer in Q3

Advanced Micro Devices (AMD) is due to report its third-quarter earnings results today after the market bell. The stock is trending higher before the company’s third-quarter earnings results despite trade war tensions and recession fears. The stock rose 3% on Monday and closed the trading session at $33.69. Notably, the stock was trading 5.2% below its 52-week high of $35.55 and 11.02% above its 52-week low of $16.03. At the closing price on Monday, AMD had a market capitalization of $36.57 billion.

What to expect from AMD’s earnings

AMD stock has been outperforming other semiconductor companies and the broader sector. The stock has gained about 68.7% this year as of Monday. In comparison, the S&P 500 has risen 21.2%. Intel (INTC) and Nvidia (NVDA) have returned 23.3% and 55.2%, respectively, this year. Other chip stocks including Micron (MU), Qualcomm (QCOM), Broadcom (AVGO), and Marvell (MRVL) have gained 53.5%, 48.9%, 15.7%, and 55.8%, respectively. The Market Vector Semiconductor ETF (SMH) has risen 47.7% year-to-date as of Monday.

So, can AMD stock maintain the growth momentum after its earnings? We’ll discuss what AMD CEO Lisa Su could offer investors in the upcoming quarter. AMD has beaten its earnings estimates in two of the last four quarters. The company met its earnings estimates in the other two quarters.

What could impact AMD’s earnings?

Su expects AMD’s gross margin to be about 43% in the third quarter, which is higher than 41% in the second quarter. Higher Ryzen, EPYC processor, and data center GPU sales will likely boost the company’s margins in the third quarter. AMD expects its adjusted earnings to grow 38.5% YoY to $0.18 per share.

The company expects its revenues to grow by around 9% YoY to $1.8 billion in the third quarter. Su expects higher sales from Ryzen, EPYC, and Radeon products to drive AMD’s third-quarter revenues. Last month, Moody’s forecasted AMD revenues to grow in the second half of 2019.

However, we expect weakness in the graphics channel and lower graphics sales to hurt the company’s revenues in the third quarter. The absence of blockchain-related GPU revenues and lower memory sales will likely dent graphic sales in the third quarter.

In the second quarter, lower graphics channel sales and semi-custom sales led to a double-digit decline in revenues. However, AMD managed to beat analysts’ estimates and deliver sequential revenue growth in the second quarter. The subsequent revenue growth came after the company gave declining revenues sequentially for the past three consecutive quarters.

Analysts expect the company’s revenues to grow 4.67% YoY in 2019 and 24.9% YoY in 2020. Meanwhile, analysts expect earnings growth of 36.3% YoY in 2019 and 69.5% YoY in 2020.

AMD’s chips to boost Q3 revenues

We think that AMD’s revenues could get a boost from new product offerings, improved GPU demand, and higher market share.

In the third quarter, AMD launched the Radeon VII—its first 7-nm (nanometer) Navi gaming GPUs. AMD’s 7-nm GPUs would compete with Nvidia, which plans to launch its 7-nm GPU in early 2020. The Navi GPUs compete with Nvidia’s existing Turing GPUs, excluding ray tracing, at a lower price. AMD also rolled out the Navi-based Radeon RX 5500 Series in early October for desktops and laptops.

AMD plans to roll out Navi 21 and Navi 23 GPUs, built on its next-generation RDNA2 architecture, in 2020. The company has dubbed these GPUs “Nvidia killers.”

AMD will likely pressure Intel in the CPU market in the third quarter. The company launched its Zen 2 architecture, 7-nm Ryzen 3000 series CPUs in July, and created a stir in the market. AMD’s new CPU, Ryzen 9 3950X, is aimed at the mainstream market and would compete with Intel’s desktop CPU Core i9 9920X. The company’s Ryzen 3000 also beat Intel in performance and power efficiency. Microsoft (MSFT) also adopted AMD’s custom Ryzen CPUs in its Surface laptop 3, while HP and Lenovo adopted the Ryzen PRO 3000 series in their enterprise desktops.

In August, AMD launched its 7-nm EPYC Rome CPU. The company’s EPYC Rome processor is cheaper than Intel’s Xeon Cascade Lake Platinum 8280. Recently, Intel reduced its processor prices to compete with AMD.

Su plans to launch AMD’s Ryzen Threadripper third-generation processors in November, which will likely threaten Intel’s market share.

US-China trade war impacts AMD

The ongoing trade war has impacted AMD. The company generates about 39% of its revenues from China and Taiwan. Earlier this month, President Trump and China reached “phase one” of the trade deal. The move could be a good sign for chip companies. A delay in the upcoming tariff hike in December might boost the stock. However, the company would still face pressure from ongoing trade bans on Huawei. Su will clarify the trade war impact during the third-quarter earnings.

Analysts’ recommendations

Analysts are mainly positive on AMD stock before its third-quarter earnings. Among the 39 analysts covering AMD stock, 16 have a “buy” rating, 22 have a “hold” rating, and one has a “sell” rating.

Currently, analysts have provided a 12-month target price of $33.54 on AMD stock. On Monday, the stock was trading at a discount of 2.4% to analysts’ 12-month target price. The median target price was $34.00 on the same date.

We think that AMD stock could move higher after its third-quarter earnings.