Despite consistent headwinds with chip supply chain challenges, semiconductor giant Advanced Micro Devices (AMD) continues to deliver strong operating results, while growing market share in several high-growth industries.
Whether its autonomous vehicles, entertainment, or healthcare, AMD’s processors are powering people and businesses at a cutting-edge level. And the company will look to demonstrate how broad its reach is when it reports third quarter fiscal 2023 earnings results after the closing bell Tuesday. Investors will look to see whether AMD's streak of earnings beats can continue; working in AMD's favor is the noticeable rebound in global PC shipments, which according to Gartner, suggests a recovery in the global PC market could be underway.
In the most recent quarter, worldwide PC shipments totaled 59.7 million units, marking an almost 17% decrease year over year. But that decline is showing signs of stabilization, including sequential growth from the previous quarter, noted Gartner analyst Mikako Kitagawa. “The rate of decline in the PC market has slowed, indicating that shipment volumes may have reached their lowest point,” said Kitagawa. adding, “There has been progress in reducing PC inventory after more than a year of issues, supported by a gradual increase in business PC demand."
Meanwhile, AMD stock, which is up 48% year to date compared with a 7% rise in the S&P 500 index, assumes these improvement trends will continue. This is because even amid the PC decline challenges or past issues related to supply chains, the company demonstrates strong operating leverage evidenced by its ability to grow profits at a faster rate than its revenue. Assuming the company’s growth metrics rebound in Q3, along with strong guidance, AMD stock will continue to rise despite its recent outperformance.
For the three months that ended September, Wall Street expects the California-based company to earn 64 cents per share on revenue of $5.37 billion. This compares to the year-ago quarter when earning were 67 cents per share on $5.62 billion in revenue. For the full year, ending in December, earnings are expected to decline 25.7% year over year to $2.60 per share, while full-year revenue of $21.5 billion would decline 8.9% year over year.
The tempered forecast for top and bottom line figures for the quarter and full year underscores the weakness that still exists in worldwide PC shipments despite the recent improvements in demand. However, Gartner expects that PC inventory will normalize by the end of 2023, and PC demand will return to growth starting in 2024. This bodes well for AMD. The company should also benefit from the improved demand in the GPU industry which is expected to rise close to 34% annually in the next five years. This is as the data center industry is expected to grow at a compound annual rate of 10.5% through 2030.
In the near term, AMD's management must find ways to offset margin erosion and the cyclicality in the chip business which have been two of the company’s biggest headwinds over the past several quarters. In the second quarter, the company beat on both the top and bottom lines with Q2 adjusted EPS of 58 cents, beating Street estimates by 1 cent, while Q2 revenue of $5.36 billion topped estimates by $40 million despite the 18% year-over-year decline.
The beat was driven by 16% rise in the Embedded segment, which offset declines in Datacenter, Gaming and Client. During the quarter, operating income swung to a loss of $20 million from a year-ago gain of $526 million. But I expect AMD’s segment growth metrics to rebound in Q3 with signs that margin pressures have bottomed and are now ready for expansion. Assuming this comes with strong guidance for the holiday quarter, AMD stock will continue to rise even with its recent outperformance.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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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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