AMD share price on watch ahead of Q2 earnings

When does AMD report earnings?

Advanced Micro Devices Inc (All Sessions) is set to release its Q2 financial results on 27 July, after market closes. At the time of writing, Refinitiv estimates its Q2 earnings per share to be US$0.54, a 3.8% increase from the previous quarter.

What to expect

AMD has largely benefited from the Covid-19 pandemic, seeing strong demand across all its products in the likes of consoles, PCs (CPUs and GPUs) and server CPUs. Revenue from Q3 2020 saw a surge, which continues into 2021, although one may note that growth sequentially may have slowed slightly as economies shift towards normalisation.

In the PC space, its revenue is growing significantly faster than the overall market, potentially suggesting some gains in market share against its competitors such as Intel Corp (All Sessions).

Its strength in seven nanometre-based processors, manufactured by Taiwan Semiconductor Manufacturing Co Ltd - ADR (All Sessions), may continue to draw a competitive edge from Intel with its focus on the premium segments, rather than low-end units. This may have been reflected in its gross margins, which have increased steadily over the past three quarters, a potential result of higher average selling prices for its premium products. Investors will be on watch for whether the growth momentum continues into the upcoming results, as demand continues to outstrip supply.

Revenue breakdown and overall gross margin

Management expects the upcoming Q2 revenue to be approximately US$3.6 billion, plus or minus US$100 million, which marks an approximately 86% growth year-on-year and 4% increase from the previous quarter. AMD’s recent approval to conduct US$4 billion in share repurchases may be a validation of management’s confidence in the businesses growth ahead, as operating cashflow seems to notice a huge improvement since Q2 2020. A further boost in cashflow in the subsequent quarters may point towards more capital distribution back to shareholders, after its first major step in share purchases.

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Cash from operating activities

For growth catalysts ahead, AMD has recently received an unconditional EU antitrust approval for its US$35 billion bid for Xilinx Inc. A successful acquisition may boost AMD’s competitiveness against peers such as Intel Corporation and NVIDIA Corp (All Sessions), at a time where Nvidia is facing some resistance from authorities in its acquisition of ARM Ltd. While the impact from the potential deal may not materialise in the coming quarter, expectations were for the acquisition to close by the end of the year, which will be immediately accretive to AMD’s margins and EPS through the synergies.

The forward guidance in the upcoming results may be expected to remain positive, as AMD begins to ramp up production of its next-generation Instinct GPU in the second half of the year to support its push into high-performance-computing, including Frontier (potentially the world’s fastest supercomputer). This may continue to be reiterated in the upcoming earnings call.

Valuation

AMD’s current forward price-to-earnings ratio stands at 34.0, commanding a significant premium over the semiconductor industry average of 17.2 and overall technology sector of 17.6. The valuation premium may come as AMD’s forward-looking growth may be higher than its peers, with its five-year historical earnings per share growth at 39.8%, compared to semiconductors industry average of 15.9%. Its revenue growth of 19.6% for the past five years also towers over the industry average of 5.0%.

Currently, the stock has 25 ‘buy’ recommendations, 15 ‘holds’ and three ‘sells’. The Bloomberg 12-month consensus target price of US$102.35 suggests a potential 17.5% upside from current price.

Technical analysis

From its technicals, AMD is finding support at an upward trendline, which has connected a series of higher price lows since May. This follows with a slight rebound off its 200-day MA. Near-term, the US$90.00 may be a resistance level to overcome, where a previous horizontal support line may now serve as resistance. Near-term support to watch may remain as the upward trendline, whereby a break below it may point to a shift in sentiments.

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