All eyes will be on the numbers when Advanced Micro Devices (AMD) reports its first-quarter results along with its guidance for Q2’19 after the market close today.
Currently, the analyst consensus anticipates that AMD will report revenue and dil. EPS of $1.26 billion and $.05, respectively. AMD’s revenue is expected to decline by -23.7% from prior-year, which would be owed to weakness in demand for GPUs. Albeit, there could be a surprise tied to GPU revenue given the launch of Radeon 7, which could drive average selling prices higher, or margins higher in the quarter, as AMD’s efforts in the $600 price range have improved markedly vs Vega GPUs.
AMD stock has steadily rallied since January 2019 with momentum improving on the prospect that the company would gain market share versus Intel.
Some of this was already priced-into shares heading into the quarter, so AMD will need to deliver a meaningful beat on guidance to move the needle further, which seems doable given the weak commentary from Intel when it announced its Q1’19 earnings results. What will likely offset some of the CPU revenue momentum would be the seasonal drop-off in semi-custom revenue, as game console sales tends to drop-off between Q4 vs Q1.
However, AMD’s CPU revenue will likely surprise to the upside as market share gains could be more significant in Q1’19 and Q2’19, which makes the business particularly attractive. Intel reported declining unit shipments tied to CPUs, implying that AMD gained 3% of the desktop market, and 4% of the notebook market in the prior quarter.
Currently, the consensus anticipates that AMD will report revenue and earnings of $1.52 billion and dil. EPS of $0.09 in Q2’19, financial guidance will need to exceed the $1.52 billion, which seems doable given the momentum in CPUs.
So, the expectations embedded into financial forecasts seem beatable, as AMD’s market share gains adds more revenue upside tied to earnings results and could even offset some of the weakness in financial results tied to GPUs and consoles. In a prior article we have published, we estimated that AMD could sell 19 million+ notebook CPU units this year, but with desktops also showing some momentum as well, it’s likely that desktop shipment growth could offer even more upside than what prior market share analysis implied.
Another major theme heading into AMD’s quarterly earnings reports will be the 7nm ramp of Ryzen series CPUs. Investors will want confirmation on the 7nm ramp and expected delivery date given Intel’s guidance of 10nm deliveries in holiday season or Q4’19. When transitioning to new nodes, AMD’s gross margins worsen given the cost of wafers are a little higher to help the fab recoup on costs tied to the new fab buildout.
Not to mention, AMD will commit more cash towards wafer supply, which may lead to some additional commentary relating to wafer supply and costs associated with those efforts. The impact from this might diminish profitability a little, but it’s really the early recognition of costs associated with deliveries of Ryzen 3 that will increase cost, as AMD is anticipated to sell-in more CPUs in the PC OEM channel and to various datacenter customers this year. So, analysts will likely shrug at the impact from acquiring added supply in anticipation of higher deliveries, but there will be a short-term recognition of cost, associated with this activity as well.
Another surprise on the quarterly call could be datacenter revenue, more specifically EPYC deliveries. Commentary coming out of Intel’s quarterly earnings report implies that AMD gained meaningful market share, as Intel’s server unit volumes fell by 8% in the prior-quarter. IT investments from a number of customers must have shifted over to AMD, though the number of unit deliveries is difficult to anticipate. We anticipate that the impact from server CPU volumes will be a positive on gross margins, as server CPUs tend to sell at higher price points than consumer CPUs, and it will also contribute to AMD’s revenue.
All in all, the set-up seems relatively attractive, as AMD has done a number of things correctly heading into the quarter, such as the pickpocketing of its number 1. rival in the CPU business. While the commentary pertaining to graphics revenue won’t add much upside, it certainly doesn’t hurt that expectations attached to the graphics business has diminished heading into the quarter, so bad news here is already anticipated.
Disclosure: The author has no position in AMD stock.
Read more on AMD: