We expect online retailer chip maker Advanced Micro Devices Inc (AMD) to beat expectations when it reports fourth quarter 2012 results on January 22nd.
Why a Likely Positive Surprise?
Our proven model shows that Advanced Micro is likely to beat earnings because it has the right combination of two key ingredients.
Zacks ESP: The Earnings Surprise Prediction or ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at +30.0%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
ZacksRank #3 (Hold): Note that stocks with Zacks Ranks of #1, #2 and #3 have a significantly higher chance of beating earnings estimates. The sell-rated stocks (Zacks Rank #4 and #5) should never be considered going into an earnings announcement.
The combination of Advanced Micro’s Zacks Rank #3 (Hold) and +30.0% ESP makes us reasonably confident about looking for a positive earnings beat on January 22nd.
What is Driving the Better than Expected Earnings?
Given the weak PC market, Advanced Micro’s decisionto diversify its business into new embedded markets along with the recent restructuring initiatives are likely to lead to a positive earnings surprise in the upcoming quarter.
The company is diversifying its business into new embedded markets, including communication, industrial and gaming among others. It expects to increase the revenue contribution from its embedded business to almost 20% from the mere 5% level at which it is currently. The restructuring initiatives will reduce the company’s expense base by 25%.
AMD’s recent launch of various new chips including its Opteron processors are suitable for use in cloud infrastructures and will help the company to increase its share in the server market and better compete with Intel's (INTC) server chips . As cloud servers represent a high-volume market, these efforts could have a positive impact on AMD’s fourth quarter earnings.
The positive trend is also seen in the trailing four-quarter average surprise of 3.20%.
Other Stocks to Consider
Advanced Micro is not the only firm looking up this earnings season. We also see likely earnings beats coming from these 2 stocks:
Expedia Inc. (EXPE), with Earnings ESP of 3.64% and Zacks Rank #2 (Buy)
Amazon.com Inc. (AMZN), with Earnings ESP of 20.69% and Zacks Rank #3 (Hold)
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