Chipmaker Advanced Micro Devices (NASDAQ:AMD) is set to report second quarter numbers after the bell today, July 25.

AMD earnings promise to present a lot of volatility. It is naturally a volatile stock that always bounces big around earnings. According to the options market, which is pricing in a 10%-plus weekly move, this time will be no different.

I also think AMD earnings will cause a lot of noise. After all, this is a stock which has shot up nearly 50% since its last earnings report. Meanwhile, the percent of the float short is above 20%, which is near multiyear highs.

Clearly, both bulls and bears have a lot of conviction about where the stock will go after earnings.

Who is right? Tough to say. AMD earnings are always wild. The company always tops estimates but the stock price reaction is usually unpredictable.

From my standpoint, this stock is fairly valued around $16, and should head towards $17 by the end of the year. Thus, strong AMD earnings could send the stock marginally higher. But, I don’t see explosive gains ahead. Moreover, I also think there is risk of a sell-off due to super-charged buy-side expectations.

As such, when it comes to AMD earnings, I’m sitting on the sidelines.

Here’s a deeper look.

AMD Earnings May Be Very Good, But Stock Price Reaction Remains Uncertain

I think AMD’s numbers will be quite good.

The secular growth drivers supporting AMD’s growth narrative — including dominance in the gaming market and growing market share in the data center, AI and cloud computing markets — remain strong today. If anything, I think they’ve actually strengthened as Epyc has scaled and gained more market share in high-end computing.

Consequently, I’m expecting a double beat quarter from AMD.

But, that has become the norm. AMD earnings are always double beat events. Since the start of fiscal 2016, AMD has reported double beats in eight of its nine quarters, including four straight double beat quarters.

Despite that solid earnings performance, AMD stock doesn’t always respond well to strong earnings. Over the past year, while AMD earnings have been consistently well-above expectations, AMD stock is up just 13%, below the market-average return of 14%.

Moreover, there was a point during that stretch when AMD stock was down nearly 35%.

Thus, while AMD earnings will likely be strong, the stock price reaction remains a huge question mark. That question mark is emphasized by the fact that AMD stock has rallied nearly 50% since its last earnings report, implying that huge buy-side expectations are already priced in. The likelihood that those expectations are met is slim.

AMD Stock Will Be Higher By the End of the Year

Although I am uncertain as to how AMD stock will react to strong earnings, I am certain that AMD stock will be higher by the end of the year.

This is a company with solid long-term growth drivers through growing market share in key secular growth markets like data-centers, AI, automation and cloud computing. Those markets also carry higher margins. Plus, robust revenue growth should drive opex leverage. Overall, then, this is a big growth company with healthy margin drivers.

I peg the company’s long-term growth prospects at 15% revenue growth per year with long-term operating margin potential of 14%, in-line with management’s long-term guide. Under those assumptions, I think that AMD can do about $1.15 in earnings per share in five years.

A growth-average 20X multiple on that implies a four-year forward price target of $23. Discounted back by 10% per year, that equates to a year-end price target of roughly $17.

Bottom Line on AMD Earnings

I think AMD earnings present a fair amount of risk for investors. As such, I’m not bullish on AMD stock into the report.

But, I do think that AMD stock will head higher by the end of the year. Consequently, I think that if this stock dips after earnings, that dip is a buying opportunity.

As of this writing, Luke Lango did not hold any positions in any of the aforementioned securities. 

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