Semiconductor giant Advanced Micro Devices (AMD) will report second quarter fiscal 2021 earnings results after the closing bell Tuesday. Despite a consistent track record for earnings beats, surpassing both revenue and profit estimates in eleven out of the last fifteen earnings reports, AMD stock has not benefited from the strong top- and bottom-line numbers the company has delivered.
It seems both the investor and analyst community have taken for granted the growth story AMD has become. AMD stock is down about 1% over the past six months, while trading flat on a year-to-date basis, compared with the 17% rise in the S&P 500 index. Given that the company has topped the Street’s revenue estimates in seven of the past eight quarters and is well-positioned to do so again, now would be an ideal time to buy AMD shares.
AMD was listed among the top-3 picks for secular cloud-driven growth among semiconductor companies by Vivek Arya, analyst at Bank of America, who cited the company’s ability to “outperform in an environment of decelerating growth for large markets including PCs, automobiles and smartphones.” AMD’s gross margin has also been a key contributor to its success and rising cash flow. Expectations are seemingly higher for AMD, especially given what appears to be market share gains it has taken from rival Intel (INTC).
The results from Intel also bodes well for AMD given the fact that Intel spoke confidently about an expected rebound in chip demand. Meanwhile, investors are also now encouraged by what appears to be a re-acceleration in both datacenter revenue and PC demand. Assuming AMD’s gross margin continues its uptrend, the stock looks significantly undervalued relative to its growth opportunity.
For the three months that ended June, Wall Street expects the California-based company to earn 44 cents per share on revenue of $3.21 billion. This compares to the year-ago quarter when earning were 18 cents per share on $1.79 billion in revenue. For the full year, ending in December, earnings are expected to surge 68% year over year to $2.17 per share, while full-year revenue of $14.74 billion would rise 51% year over year.
The strong top and bottom line forecasts for the quarter and full year suggest the market assumes a full pandemic recovery in AMD’s business going forward. The company recently initiated shipments for the third-generation CPUs. Analysts have cited increased demand for these chips, particularly among cloud giants such as Microsoft (MSFT) and Alphabet (GOOG , GOOGL). AMD’s own execution plays a key role in the market’s confidence.
In the first quarter not only did AMD beat on both the top and bottom lines, the Computing and Graphics segment reported revenue of $2.1 billion, beating consensus of $1.91 billion. This marks an impressive surge of 46%, driven by strong sales of its Ryzen processors. The company's Enterprise, Embedded and Semi-Custom segment was also strong, posting Q1 revenue of $1.35 billion, which rose 286% year over year. Increased demand for semi-custom and EPYC data center processor were the main factors.
While Intel has dominated the datacenter market, as noted, there is now a significant shift toward AMD. And there appears to be no signs of slowing down. AMD guided for full-year revenue growth of 50% driven by growth across all segments, compared to the prior forecast of 37% annual growth. All told, you would be hard-pressed to find a better-performing chip company. But AMD on Tuesday must deliver the goods to keep the momentum going.
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