Semiconductors have gone through a slowdown cycle that has caused investors to rethink the long-term outlook of the entire sector. But shares of Advanced Micro Devices () have gone in the opposite direction, suggesting AMD investors believe the company’s prospects are much better than near-term headwinds.
The company is set to report second-quarter fiscal 2019 earnings results after the closing bell Tuesday. Ahead of Tuesday’s numbers, AMD stock has returned almost 85% year to date, crushing the industry’s 20% gain in the S&P 500 index. You would have to go back more than a decade to find the last time AMD stock traded at this level. While there are still question marks about the chip sector’s prospects in the second half of the year, due to tariff concerns and other headwinds, there are tons of reasons to suggest the market’s optimism about AMD is well-paced.
The company’s popularity has been driven by several factors, namely its improving business conditions and AMD's diverse range of products for growing markets, such as client CPUs, server CPUs and GPUs for data centers and gamers. The recent entry in the realm of gaming by Apple () and Google’s ( , ) Stadia have magnified AMD’s growth potential in gaming. Can AMD’s earnings and guidance Tuesday keep the momentum going?
For the three months that ended June, Wall Street expects the California-based company to earn 8 cents per share on revenue of $1.52 billion. This compares to the year-ago quarter when earnings were 14 cents per share on $1.76 billion in revenue. For the full year, ending in December, earnings are expected to surge 40% year over year to 65 cents per share, while full-year revenue of $6.87 billion would rise 6.2% year over year.
In the first quarter, AMD delivered adjusted earnings of 6 cents per share which topped Street estimates by a penny, while first-quarter revenue of $1.27 billion beat consensus estimates by about $10 million. While the company is still recovering from the challenges caused by waning GPU (graphic processing units) demand — those used in cryptocurrency mining, which has resulted in excess inventory — the first-quarter gross margin was up five percentage points year over year to 41%, thanks to the Ryzen ramp and EPYC sales.
However, given the recent earnings from chip stocks like Intel () and Texas Instruments (), it doesn’t appear as if the second-half recovery the market has expected for the sector will materialize. That said, Cowen analyst Matthew Ramsay is not worried. Ramsay, who rates the stock as Outperform, recently raised his price target to $40 from $36, saying he believes the Street is comfortable with the second half coming in a little light.
Nevertheless, on Tuesday, investors will look to see whether the management will guide in a way that suggests optimism about the second half. What stands out, meanwhile, is that, whether in its client CPUs, server CPUs, and GPUs for data centers and gamers, AMD has delivered and continues to gain market share. And assuming a top- and bottom-line beat Tuesday, along with confident guidance, AMD shares are poised to make new highs.
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