Advanced Micro Devices (AMD) released its third-quarter earnings results after markets closed yesterday, meeting analysts’ estimates. It was AMD’s best quarter in years. The company’s PC and data center segments were its strongest. Despite the company’s positive performance, AMD stock fell 2.8% in early trading. Where did it fall short of investor’s and analysts’ expectations?
AMD earnings results precede stock decline
This year, AMD stock has risen 75% to $33.03, which is 30.9 times analysts’ forward EPS estimate. This PE ratio suggests investors have already priced in the company’s strong earnings. Moreover, AMD’s fourth-quarter guidance fell short of analysts’ estimates.
Expectations may have been raised after AMD rival Intel’s beat analysts’ earnings and guidance estimates by a wide margin. The results sent rival stocks Intel (INTC) and Nvidia down 1% in early trading.
AMD’s best quarter in years
The third quarter was among AMD’s best because it included the initial sales of its 7nm (nanometer) Ryzen, Radeon, and Epyc processors. Smaller transistors offer better performance and power efficiency. The 7nm products put AMD ahead of Intel in the process node for the first time. AMD also reached some record highs in the third quarter:
- Its revenue rose 9.1% YoY (year-over-year) to a 14-year high of $1.8 billion. The last time AMD’s quarterly revenue crossed $1.8 billion was in the fourth quarter of 2005, when it launched its Opteron server CPU (central processing unit). This CPU helped it gain a 20%–25% market share in 2016.
- AMD’s quarterly client CPU sales reached their highest since 2011. The company doesn’t give a breakdown of its CPU and GPU (graphics processing unit) revenue. However, its compute and graphics revenue rose 36% YoY and sequentially to $1.28 billion, beating analysts’ estimate of $1.13 billion. The growth was largely driven by Ryzen CPUs, whose volumes and ASPs (average selling prices) grew significantly. On the other hand, Intel’s PC CPU revenue fell 7.1% YoY as CPU supply shortages pulled its volumes down 10%.
- AMD’s server CPUs recorded their highest quarterly revenue since 2006, when its Opteron server CPU sales were at their peak. AMD does not give a breakdown of its server CPU and semi-custom sales, but CEO Lisa Su stated that EPYC revenue rose 50% sequentially. This kind of growth reflects the strong adoption of AMD’s second-generation EPYC Rome CPUs, launched in August.
- AMD’s consumer GPU sales rose YoY, driven by higher channel sales. This growth shows excess GPU channel inventory because of the crypto bubble burst had finally sold off. The correction in channel inventory paved the way for new Navi GPUs.
- AMD’s non-GAAP gross margin expanded by 300 basis points YoY to 43%, its widest since 2012.
AMD’s fourth-quarter guidance below analysts’ estimates
In the fourth quarter, AMD expects its revenue to rise 48% YoY and 16.7% sequentially to $2.1 billion at the midpoint. That guidance missed analysts’ estimate of $2.15 billion. Lisa Su expects server CPU revenue to grow “by a strong double-digit percentage” sequentially. She also expects PC CPU revenue to grow sequentially, driven by sales of the upcoming 7nm Ryzen 3950X and Ryzen Threadripper. She expects this growth to be partially offset by a 30% decline in semi-custom sales as Xbox and PlayStation consoles approach the end of their product cycle. AMD expects its non-GAAP gross margin to be 44% and operating expense ratio to be 30%.
AMD’s long-term financial model is to maintain double-digit revenue growth, a 40%–44% gross margin, a 26%–30% operating expense ratio, and over $0.75 EPS. It aims to achieve this model by launching competitive products that command higher ASPs. The third quarter offered a glimpse of this long-term goal. Its revenue, profit margins, and EPS rose significantly because of its 7nm product ramp-up.
Lisa Su’s comments on AMD’s earnings momentum
Next year is set to be exciting for AMD, especially from the game console standpoint. Both Sony and Microsoft are set to launch their next-generation game consoles in the year’s second half, driving AMD’s semi-custom orders. AMD also plans to launch its 7nm Ryzen notebook CPUs and higher-end 7nm Radeon Navi GPUs next year. Lisa Su stated in the Q3 earnings call that strong product momentum will help AMD increase its “share of the $75 billion market for high-performance computing and graphics technologies.” She expects to achieve a double-digit share of the server CPU market by mid-2020. Su said, “We are right where we want to be on our long-term strategic plan.”