Semiconductor giant Advanced Micro Devices (AMD) will report third quarter fiscal 2021 earnings results after the closing bell Tuesday. Having surpassed both revenue and profit estimates in ten straight quarters, it appears AMD is finally getting the respect it deserves.
AMD stock has skyrocketed over the past several weeks, rising 16% in thirty days and 46% in six months, besting respective gains of 5% and 9% for the S&P 500 index in those time periods. Benefiting from secular cloud-driven growth within the datacenter and the PC market, the market is no longer taking the company for granted, especially given what appears to be the company’s ongoing market share gains it has taken from rival Intel (INTC).
Shifting its production to higher-margin chips, not only does the company continue to grow its revenue, AMD is also capitalizing on its performance leadership with higher prices for its chips. As such, AMD’s gross margin has become a key contributor to its success and rising cash flow. Assuming these metrics maintain their uptrend in the coming quarter, the stock can still move higher despite its strong year-to-date performance, rising 30% against the S&P 500 index’s 21%. And given the company’s streak of earnings beats, it would be a mistake to part with AMD stock.
For the three months that ended September, Wall Street expects the California-based company to earn 67 cents per share on revenue of $4.11 billion. This compares to the year-ago quarter when earning were 41 cents per share on $2.56 billion in revenue. For the full year, ending in December, earnings are expected to surge 93% year over year to $2.49 per share, while full-year revenue of $15.66 billion would rise 60% 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. Driven by the successes of the Ryzen processor series in the Computing and Graphics business and the EPYC processor series in the data center/server business, AMD has enjoyed a surge in revenues not only in both sectors, but also the Enterprise business. And the company is armed with a strong product lineup that is poised to power its growth into 2022 and beyond.
In the second quarter, AMD’s Computing and Graphics revenues surged 65% year over year to $2.3 billion, while revenues in Enterprise, which includes EPYC server processor sales, surged 183% year over year to $1.6 billion. Consistently strong demand in the EPYC processor revenues from cloud giants such as Microsoft (MSFT) and Alphabet (GOOG , GOOGL) and semi-custom product drove the almost 200% revenue surge.
Meanwhile, AMD’s product innovation and strong commercial execution resulted in record Q2 cash flow of $888 million, translating to a free cash flow margin of 23%. Notably, the company’s strong commercial performance and product launches have been realized with the benefit of Xilinx which is still waiting for merger approval. AMD acquired Xilinx, spending $35 billion, to leverage Xilinx’s strength in the data center business. AMD is now demonstrating it can operate without the M&A risk.
On Tuesday investors will nonetheless want an update to the Xilinx deal which is still pending regulatory approval. But even without Xilix, you would be hard-pressed to find a better-performing chip company today. AMD on Tuesday must deliver the goods to keep the momentum going.
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