Despite an initially negative response after earnings, investors holding Advanced Micro Devices (NASDAQ:AMD) are growing confident in its prospects. For the rest of 2019, AMD expects growth accelerating in the desktop, notebook, server, and semi-custom space.
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For the second quarter, AMD reported EPS of $0.08, despite revenue falling 12.81% year-over-year to $1.53 billion. Strong CPU revenue was offset by a drop in semi-custom and GPU sales. Weaker chip sales for consoles made by Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) weighed on overall results. Looking ahead in this space, both Sony and Microsoft will source SoCs from AMD for their next-generation consoles. And even though revenue will probably remain weak from semi-custom, AMD’s profit margins will remain at healthy levels.
AMD’s next-generation Rome server is on time and is exceeding expectations. The chip is delivering on industry-leading performance and TCO (total cost of ownership) for an expanded number of cloud and enterprise workloads. Rome has more traction than the first-generation EPYC processors. Twice the number of platforms are developing for this architecture. And AMD has a larger set of partners this time around. Add four times more enterprise and cloud customers involved before its launch and it is clear that sales will grow at a better pace. This will give profit margins a healthy lift.
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Rebound from Weak GPU Sales
During the quarter, AMD ramped up production of Radeon 5700 GPUs. The release introduces the new RDNA architecture that delivers up to 1.5 times more performance per watt compared to previous generations. AMD noted strong initial demand, with third-party reviewers complimenting the GPU’s favorable game performance relative to its pricing.
Although revenue declined in the Graphics segment due largely to lower channel sales, data center GPU sales rose significantly. Blockchain-related revenue was negligible in the quarter, as expected. But with bitcoin prices rebounded since May, investors might expect sales from the cryptocurrency resurgence potentially recovering.
Growth Opportunity
AMD’s 7-nanometer product line will eventually offer margins greater than 50%. For the third quarter though, the company guided gross margin of 43%. But by Q4, this should increase. TSMC (NYSE:TSM) is more than supportive operationally in meeting the ramp-up of these chips. Barely a month on the market, Ryzen’s third-generation CPU promises to add to AMD’s revenue. Launched globally, the Ryzen refresh will accelerate AMD’s market share gains in the PC market. Additional product releases that add to a better product mix suggests profits will grow at improving rates.
Sales of the fifth-generation chip production for Microsoft and Sony consoles will start adding to AMD’s revenue in the second half of the year. Ahead of the holiday season of 2020, investors should expect the company to book significant revenue growth in the semi-custom space.
AMD’s multi-year deal to supply GPU licenses for Samsung ushers in a new era for GPUs in the smartphone space. AMD will earn $100 million from the deal, offset by some specific development costs and COGS (cost of goods sold). But most importantly, it broadens the chip maker’s revenue line in the Asian-Pacific region. So even though weak performance in China had a minimal impact on its revenue, AMD may now develop a market in the smartphone space.
Valuation and Your Takeaway on AMD
Based on 22 analysts offering a one-year price target on AMD, the average target is $34.10, not far from the $31.18 recent closing price. Similarly, investors forecasting revenue growth of at least 15% in a 5-year DCF Revenue Exit model will arrive at a similar price target. With AMD’s rich product launch schedule ahead and its 7-nanometer road map, AMD stock will continue rewarding investors over the next few years.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
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