AMD: The Upside Opportunity Outweighs the Risk
Advanced Micro Devices (AMD) reported a fairly solid quarter albeit the impact from CPUs was still unable to offset the weakness in graphic segment revenues. This was broadly anticipated given the steep drop-off in demand for GPUs in general. Overall, the chip giant reported Q1’19 revenue of $1.27 billion and dil. EPS of $0.06, slightly beating consensus estimates of $1.26 billion and dil. EPS of $0.05.
AMD stock responded mildly to the earnings announcement, as shares advanced only 0.50% in Wednesday's trading session.
Despite the on-going decline in GPU related revenue, AMD’s positioning in the CPU segment was affirmed with strong commentary relating to Ryzen and impending launches of 7nm products. CEO Lisa Su goes onto mention within the press release, “We delivered solid first quarter results with significant gross margin expansion as Ryzen and EPYC processor and datacenter GPU revenue more than doubled year-over-year. We look forward to the upcoming launches of our next-generation 7nm PC, gaming and datacenter products which we expect to drive further market share gains and financial growth.”
AMD stock responded mildly to the earnings announcement, as shares advanced only 0.50% in Wednesday's trading session.
AMD is anticipating a recovery across all of its reporting segments and affirmed the release of a PlayStation 5 featuring AMD’s Zen 2 plus Navi GPU (7nm) architecture via its earnings release slides. Gross margins improved to 41% in Q1’19 versus 36% from Q1’18, which was related to higher GPU and CPU pricing, along with datacenter mix leading to higher gross margins.
AMD Q2’19 guidance on revenue, “For the second quarter of 2019, AMD expects revenue to be approximately $1.52 billion, plus or minus $50 million, an increase of approximately 19 percent sequentially and a decrease of approximately 13 percent year-over-year. The sequential increase is expected to be driven by growth across all businesses. The year-over-year decrease is expected to be primarily driven by lower graphics channel sales, negligible blockchain-related GPU revenue and lower semi-custom revenue.”
The revenue guidance of $1.52 billion +/- $50 million, compared to consensus expectations of $1.52 billion implying that if AMD’s internal models are correct, the company will deliver a modest revenue beat next quarter when assuming a best-case scenario. However, the guidance for FY’19 (full-year results) implies a steep 2H’19 ramp-up of revenue, as AMD forecasts that revenue will grow by “high single digit percentages,” and gross margins to stay above 41% despite the launch of new products heading into the second half of the year.
Given the 23% sales decline in Q1’19, and anticipated 13% sales decline in Q2’19, for AMD to report +8% or +9% sales growth in FY’19, 2H’19 (second half) revenue would need to grow by 20%+. This seems doable given the market share gains from Intel in the CPU segment, whereas graphics revenues are expected to stabilize and improve sequentially throughout the year. The full-year revenue outlook was the biggest surprise coming out of the quarter, as consensus estimates implied +5% sales growth in FY’19 versus +8% or +9% sales growth from financial outlook.
The drop-off in semi-custom revenue and graphics card shipments was anticipated exiting the quarter, though the up-beat commentary relating to 2H’19 results diminishes concerns tied to graphics and semi-custom revenue. The weakness in semi-custom results comes at a time where we’re nearing the end of a console generation with annual comps anticipated to improve on the launch of next-gen consoles next-year. Also, the downbeat commentary relating to graphics could inflect more positively in the 2nd-half with declines likely to moderate given the launch of 7nm Navi GPUs.
Bottom line:
Risk/reward seems to favor AMD bulls. AMD delivered solid earnings, and back-half guidance was the biggest surprise coming from the report. Assuming AMD delivers next-gen products on time, and market share and margins continue to improve sequentially throughout the year, fundamentals should lead to better stock performance over the next 12-months.
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