Why the AMD stock stands to gain from Q2 earnings

US semiconductor firm Advanced Micro Devices (NAQDAQ: AMD) is due to report its second quarter 2020 financial results on Tuesday 28 July after the close of market.

Below, we highlight three key considerations that investors should pay attention to ahead of AMD’s upcoming earnings report.

AMD stock has soared 25% since mid-July 2020

The AMD stock rallied over 25% last week, overtaking rival Intel’s nominal share price in the process for the first time.

A couple of factors had contributed to this.

Firstly, AMD shares skyrocketed 17% just this past Friday (24 July) alone, after Intel Corp (NASDAQ: INTC) announced that the production of its next-generation 10nm desktop processors will be delayed by six months.

Still related, Intel also provided a weaker-than-expected guidance for its third-quarter fiscal 2020 earnings per share (EPS) of US$1.10, which were below Wall Street estimates.

Following that, AMD stocks hit US$69.66 per share, while Intel’s fell to US$50.27 per share.

Secondly, AMD also launched the AMD Ryzen 4000 Series Desktop Processors with Radeon Graphics and the AMD Athlon 3000 Series Desktop Processors with Radeon Graphics, its newest desktop processors with built-in graphics for consumer and commercial PC markets, earlier in the week.

Share price shot up over 10% the following day.

Analysts see more upsides for AMD share price

On a technical basis, IG analyst Pan Jingyi wrote that AMD’s latest price surge ‘corresponds with the longer-term uptrend for prices and opens up further room on the upside seeing the pop from the US$49-US$59 band’.

‘That said, prices do look overextended on the relative strength index and may be susceptible to a short-term pullback, although the US$60 resistance-turned-support could offer to curb short-term downsides,’ she added.

In terms of AMD's fundamentals, Bloomberg Intelligence analysts Anand Srinivasan and Marina Girgis wrote in a recent note that the company’s ‘refreshed CPUs and GPUs across servers, PCs and game consoles may help fuel 23% sales growth in 2020’.

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They noted that this will be predicated on a 45% gross margin pushing EPS to US$1.03, based on an internal scenario analysis.

‘The implied 62% EPS growth is more tempered than before, but AMD's chip-product rollout plans are well-situated for 2H and 2021, in a push to snag share from Intel in PCs and servers,’ they wrote, adding that weaker shipments of PCs and consoles, and uneven sales of cloud servers are key risks for the stock.

Meanwhile, Mizuho Securities USA analysts cautioned that if AMD's current momentum from current Intel missteps decelerates, AMD could fall short of its 10% server targets by mid-2020.

In addition, they noted that a slowdown in PC gaming or weaker-than-expected adoption of next generation Microsoft or PlayStation consoles could create a significantly weaker-than-expected second half of fiscal 2020.

AMD’s earnings were in line with estimates the last two quarters

Analysts polled by Factset have given a consensus EPS estimate of US$0.16 per share alongside expected revenues of between US$1.85 billion and US$1.9 billion for the computer chipmaker’s Q2 2020 report.

This matches the company’s own guidance that had been provided in April’s Q1 2020 earnings release. AMD had stated that it expects revenue to increase approximately 21% year-over-year and 4% on a quarterly basis, ‘primarily driven by growth of Ryzen and EPYC processor sales’.

It also expects non-GAAP gross margin to be approximately 44% in the second quarter of 2020, which would represent a decline of 2% from Q1 2020.

For existing shareholders, it is probably worth noting that Q2 2019’s reported EPS of US$0.08 per share were in line with analysts’ projections. Reported sales at US$1.5 billion were also on par with estimates.

AMD’s last two reporting quarters – namely Q1 2020 and Q4 2019 – were also on target. Assuming this trend keeps up, investors are looking at a potential 100% increase in EPS.

Finally, AMD is also expecting 2020 revenue to grow by roughly 25% from 2019, ‘despite expectations of weaker Covid-19 related consumer demand in the second half of the year'.

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