There is a noticeable rebound in global PC shipments, according to Gartner, which noted that a recovery in the global PC market is underway, highlighting an 8.1% sequential increase compared to the previous quarter. This bodes well for Advanced Micro Devices (AMD), which is one of the key players in the global semiconductor industry.
While AMD has consistently grown its market share of the global CPU processors, driven by product innovations such as its Ryzen processors built on the Zen microarchitecture, margin erosion and the cyclicality in the chip business have been two of the company’s biggest headwinds over the past several quarters. The company will report second quarter fiscal 2023 earnings results after the closing bell Tuesday.
Investors are anxious to see whether margin pressures have bottomed and are now ready for expansion. Analysts will be also looking for further signs of improved assets turnover, namely the company’s acquisition of Pensando and Xilinx. Meanwhile, AMD stock, which is up 73% year to date, compared with a 18% rise in the S&P 500 index, assumes these issues are in the rearview mirror. This is because even amid these challenges the company demonstrated strong operating leverage evidenced by its ability to grow profits at a faster rate than its revenue.
While AMD delivered a marginal beat on revenues, EPS fell short of expectations due to a sharp decline in global PC shipments. As noted, the market broadly expects PC shipments to pick up, but there’s still the question of whether margin pressures have bottomed out and are ready for expansion. Assuming the company’s growth metrics rebound in Q2 and the management issues strong guidance, this would present a great buying opportunity for AMD stock for the next 12 to 18 months, despite the strong run it has already been on.
For the three months that ended June, Wall Street expects the California-based company to earn 57 cents per share on revenue of $5.31 billion. This compares to the year-ago quarter when earnings were $1.05 per share on $6.55 billion in revenue. For the full year, ending in December, earnings are expected to decline 18.5% year over year to $2.85 per share, while full-year revenue of $22.98 billion would decline 2.6% year over year.
The downbeat forecast for top and bottom line figures for the quarter and full year highlights the setbacks within the PC market and datacenter business segments that have impacted the quarterly results. This has been the trend in recent quarters as the company attempts to navigate these headwinds including inflationary impacts on its high-margin enterprise business. There is still optimism in the graphic processing unit (GPU) as the industry which is expected to grow more than 30% annually in the next five years.
Meanwhile, the datacenter industry is expected to grow at a compound annual rate of 10.5% through 2030. The company's position in AI accelerators is also improving, albeit at a more modest pace than Nvidia (NVDA). Nevertheless, all of these items suggest that AMD still has multiple long-term levers to pull. In the near term, the company will look to bounce back from a challenging first quarter, which resulted in double-digit decline in the share price as revenue declined 9%.
This is despite a top and bottom line beat, with Q1 adjusted EPS of 60 cents topping forecasts by 4 cents, while Q1 revenue of $5.35 billion beat by $44.7 million. Regarding AI, CEO Lisa Su said, “AMD is looking for AI to be one of the keys to its future market expansion.” Adding, "We are in the very early stages of the AI era and AMD is in a strong position for this opportunity."
Assuming AMD's growth metrics rebound in Q1 and the management issues strong guidance, this would present a great buying opportunity for AMD stock for the next 12 to 18 months.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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