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Will GPU Product Introduction Benefit AMD's Q4 Earnings?

Zacks Equity Research

Advanced Micro Devices Inc AMD is set to report fourth-quarter 2018 results on Jan 29.

Notably, AMD has a positive record of earnings surprises in the trailing four quarters, the average surprise being 24.7%. In the last reported quarter, earnings of 13 cents per share were in line with the Zacks Consensus Estimate but jumped 44.4% year over year.

Revenues increased 4.4% year over year to $1.65 billion but lagged the Zacks Consensus Estimate of $1.71 billion. IP-related revenues were $86 million, including revenues related to THATIC joint venture. Strong computing and graphics segment revenues drove year-over-year growth.

Estimates & Guidance

For fourth-quarter 2018, AMD expects revenues to be roughly $1.45 billion (+/-$50 million), up 8% on a year-over-year basis.

The Zacks Consensus Estimate for fourth-quarter revenues is currently pegged at $1.44 billion, reflecting year-over-year decline of almost 2.7%. Moreover, the Zacks Consensus Estimate for fourth-quarter earnings is currently pegged at 9 cents, displaying year-over-year growth of almost 12.5%.

Management expects client compute business, which faces seasonality in the fourth quarter, to perform better, due to strong adoption of new products. The company anticipates the server business to grow on solid adoption of EPYC products by cloud service providers.

Moreover, graphics business is expected to grow sequentially, on the back of product portfolio strength that includes new datacenter GPU products. However, semi-custom is projected to decline sequentially in the to-be-reported quarter.

Notably, AMD’s stock has returned 59.6% year over year, against the industry’s decline of 1.8%.

Let’s see, how things are shaping up prior to this announcement.

Product Rollouts: Key Catalyst in Q4

AMD’s portfolio strength is a key catalyst. The company recently unveiled its new Radeon RX 590 graphics card. Notably, AMD also presented its new Radeon Software Adrenalin 2019 Edition. This updated version will feature the WattMan technology and be based on the AMD Radeon Graphics Processing Units (GPUs). This card is ideal for gamers who require superior graphic performance and high-quality visual experiences.

Going forward, AMD launched the much-awaited next generation 7-nanometer (nm) Radeon Vega GPU, AMD Radeon VII.

These launches are likely to provide AMD an edge against the likes of NVIDIA NVDA and Intel. With these cards, AMD is foraying into the high-end graphics card market. Consequently, AMD’s revenues are poised to benefit significantly if the latest GPU can cater to the rising demand of the users.

Moreover, robust sales of GPU, driven by increasing adoption of AI techniques and machine learning tools in industries like gaming, automotive and blockchain, present significant growth opportunity.

Moreover, strong adoption of EPYC server processors is another catalyst. The company’s partnerships with major game developers like Ubisoft, Capcom and Rebellion to optimize their next generation of games on Radeon graphics is also a major growth driver.

However, intensifying competition in the traditional pc market and GPU segment, and customer concentration are the major headwinds.

What the Zacks Model Unveils

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

AMD has a Zacks Rank #3 and an Earnings ESP of -6.8%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks with Favorable Combination

Here are a few stocks that are worth considering as our model shows that these have the right combination of elements to deliver an earnings beat in the upcoming releases.

Caterpillar Inc. CAT has an Earnings ESP of +0.30% and a Zacks Rank #2.You can see the complete list of today’s Zacks #1 Rank stocks here.

Illumina, Inc. ILMN has an Earnings ESP of +0.32% and a Zacks Rank #2.

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