The Advanced Micro Devices (NASDAQ:AMD) stock price is rallying into earnings — and there’s a core reason why. News elsewhere in the semiconductor industry has been mostly solid. Optimism toward the sector has driven Advanced Micro Devices stock off support at $28 earlier this month. Multi-year highs above $35 seem next.
But for the AMD stock price to reach its highest level since 2006, earnings on Tuesday afternoon need to cooperate. A big report can lead Advanced Micro Devices stock to finally bust through resistance to a new 13-year high. Anything less, however, could be trouble not only for AMD, but for other chip stocks as well.
AMD Stock Rallies Into Earnings
The AMD stock price has been stuck in a range for some four months now, holding between support at $28 and resistance around $34. As I wrote early last month, there seems to be a tug of war between the obvious quality of AMD’s business and the similarly apparent concerns about valuation.
Q2 earnings in July didn’t settle the argument. AMD stock fell after the report amid a broader sell-off, with light guidance for Q3 seen as disappointing. But the declines quickly reversed when AMD announced it was delivering its EPYC chips to Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Google Cloud.
The Q3 report after the close on Tuesday may see more in the way of fireworks. Expectations are higher, with Street consensus projecting a nearly 5% increase in revenue year-over-year. That follows a 13% year-over-year decline in Q2 driven largely by the “crypto hangover” that affected GPU revenue for both AMD and Nvidia (NASDAQ:NVDA). Q4 guidance will be closely watched, as analysts are looking for a huge quarter, with sales up over 50% against Q4 2018.
Margins will be another point of emphasis. Adjusted gross margin was 40% in Q3 2018, and 41% in this year’s second quarter. Street estimates for 37% year-over-year EPS growth on a ~5% increase in sales suggest the Street is looking for further expansion on that front.
Gross margin matters not just in terms of the response to the quarter, but as a key driver for the long-term profit growth still priced in to a stock trading at 31x FY20 consensus earnings.
There will be several key metrics on which investors will focus. As a result, this may be the quarter that breaks the recent range. Options markets seem to think so: at Friday’s close, they priced in a nearly 10% move in the AMD stock price this week.
Earnings Important Not Just for Advanced Micro Devices Stock
It’s not just the AMD stock price that will move next week. Semiconductor stocks as a group may well respond after recent volatility.
The sector last week saw pressure after Texas Instruments (NASDAQ:TXN) released a disappointing report and cut full-year guidance. But increasingly it looks like TXN earnings may have been an outlier.
Equipment manufacturer Lam Research (NASDAQ:LRCX) gave strong guidance with its fiscal Q2 report and gained nearly 14%. AMD rival Intel (NASDAQ:INTC) gained 8% on Friday after its earnings report showed an improving market and drew praise from Wall Street. As a result, the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) reached an all-time high on Friday.
And so AMD earnings will have an impact beyond the AMD stock price. A big report from AMD confirms the solid outlooks from Intel and Lam Research. It cements the idea that Texas Instruments either lost market share and/or just had a strange quarter from a timing perspective, and adds to the sense that the entire industry is on track. The big drivers of semiconductor optimism — cloud, 5G, Internet of Things — all appear intact. And the group can keep moving higher.
If AMD disappoints, particularly in terms of guidance, the story for the sector looks different. Results now look mixed. The optimism driving guidance from Intel or demand for Lam Research appears more questionable. AMD earnings don’t necessarily send chip stocks plunging, but at least a few investors might ask if the space necessarily merits all-time highs.
That would go double for the AMD stock price. Disappointing results relative to Intel undercut the market share-based thesis that underpins the bull case for Advanced Micro Devices stock. A big quarter likely gets the stock through $35 — and from there, a breakout could follow. The response to Q2 was somewhat quiet; it seems likely that won’t be the case on Wednesday.
As of this writing, Vince Martin has no positions in any securities mentioned.
