AMD: Prepare For Impact

july 31 2018 santa clara ca usa AMD: Prepare For Impact

After the market closes today, AMD Advanced Micro Devices, Inc. (NASDAQ:AMD) will release its financial results for the second quarter. Investors speculate about AMD’s top line after its larger rival, Intel Corporation (INTC), missed the Street’s revenue projections for the quarter last week. Investors should, however, keep an eye on AMD’s average selling price (or ASP), shipment growth, bifurcated revenue, and management’s expectations for the third quarter, in addition to the revenue figure. These factors will highlight AMD’s short-term prospects and are likely to have an impact on the direction that its shares take. Let’s examine everything in more detail.

Running Metrics

Let me begin by stating that AMD is now dealing with a few dynamics that, in my opinion, could muffle its performance shortly. To begin with, Bitcoin values have plummeted over the past three months, and mining isn’t as profitable as it once was. Crypto mining has consequently curtailed GPU purchases and swamped the market with secondhand GPUs, driving down GPU prices globally.

Additionally, AMD plans to introduce its 7000-series GPUs in the upcoming months. This implies that PC gamers without a rigid schedule may hold off on making any purchases right now.

Finally, late last year, Intel unveiled its lineup of 12th-generation CPUs. It comes with significant improvements over AMD’s 5000-series Zen 3 CPUs, which were released over two years ago. While AMD is still a few months away from releasing its 7000-series Zen 4 CPUs, it will have to contend with its comparatively old SKUs in the interim.

All these variables point to a slow Q2 and Q3 for AMD before its sales finally take off in Q4 after new SKUs are made available. In the interim, its management has a few aces in its sleeve to rekindle consumer demand. To compensate for the weak demand, they may, for example, redirect a portion of their manufacturing to the undersupplied low and midrange laptop sectors. To be competitive, they also drastically reduced the cost of their CPU and GPU.

Therefore, the first task should be to assess how Q2’s shipment volume and average selling prices have changed for AMD.

Numerous possible outcomes could occur.

  • If shipment growth accelerates but ASP declines, then AMD’s pricing strategy was successful;
  • If shipment growth slows, but the average selling price falls, this could indicate that AMD failed to boost customer demand and is up against fierce competition from Nvidia (NVDA) and Intel;
  • If shipping and ASP growth are both high, which I deem doubtful, it will imply that AMD’s products are still in demand despite being somewhat antiquated and are fending off competition.

I think AMD’s shipping volume will increase by high single digits during the quarter while its average selling prices will decline by low single digits. My justification is that there is still a global shortage of semiconductors. AMD could have expanded volume shipments by seizing growth opportunities in the computing industry, albeit at lower prices. The chipmaker’s volume growth should continue to be aided by the strengthening semiconductor supply. But when AMD releases its Q2 results in a few hours, we’ll have to wait and see what the actual situation is.

Revenue Division

The revenue of AMD is divided into three reportable divisions. With almost 48 percent of the business’s sales in the most recent quarter, its Computing and Graphics sector was by far the largest in terms of revenue. For those unaware, the sector comprises the sales contribution of GPUs, consumer-grade CPUs, and APUs. AMD’s consumer-focused business is anticipated to have a volume increase but at lower average price points, as I detailed in the section above. Therefore, I anticipate this revenue stream will increase sequentially at high single-digit rates (9%) and total $3.05 billion for the quarter.

Secondly, AMD’s Enterprise, Embedded and Semi-Custom division generated roughly 43% of the business’s overall sales in Q2. The market includes bespoke SoCs, server/embedded processors, development services, and IP licensing. These processors are used in gaming consoles, among other platforms. It’s important to note that sales of the game consoles used by Microsoft (MSFT) and Sony (SONY, OTCPK:SNEJF)—both of which employ AMD’s proprietary chips—are slowing down. As a result, I anticipate this segment’s results to be muted for the quarter. In terms of predictions, I think AMD’s EESC revenue will increase by a mid-single-digit (5%) percentage and total $2.65 billion in Q2.

Last but not least, AMD’s Xilinx subsidiary will probably benefit from growing integration with the chipmaker’s other enterprise-focused products and solid demand patterns for data centers. Therefore, I project that this segment’s revenue will increase by 7% sequentially in Q2 2022 and total $598 million. This results in a $6.3 billion company-wide total sales figure, up 63.8% over the prior year and up 7.1% sequentially. However, as it turns out, analyst predictions range between $6.52 billion and $6.71 billion, showing that the Street is far more bullish than I am.

The revenue forecast provided by AMD management for the third quarter and the remainder of the year should be closely monitored. In my last piece, I demonstrated how AMD’s channel partners see a decrease in sales and how the chipmaker may experience a similar problem during its third quarter. So, pay attention to see if management confirms or rejects the information.

Furthermore, some of Intel’s “biggest customers are lowering inventory levels at a rate not seen in the last decade,” according to management, who mentioned this on last week’s earnings call. This is precisely in line with the finding from my earlier supply chain article. But more significantly, is this inventory dynamic also present for AMD? How would this influence AMD’s sales in the second half of this year if that is the case?

Final Reflections

I anticipate AMD to keep expanding quickly in the coming years and think it’s an excellent investment for long-term investors. The chipmaker has a few risks, which could hamper its momentum for growth in the upcoming quarter. Therefore, to better understand where the firm and its shares might be headed in the future, investors may want to keep an eye on the chipmaker’s ASP and shipment growth, its split financials, and its management’s view for Q3. Best of luck!

Featured Image: Megapixl © Andreistanescu 

Please See Disclaimer