When Intel (NASDAQ:INTC) reported quarterly earnings strength but issued a product delay, it handed the reins again to Advanced Micro Devices (NASDAQ:AMD). Every quarter that passes, AMD stock benefits from Intel’s stumbles. And last week, after shares took a new high at nearly $70, investors have high expectations for the company’s earnings.
What then should investors expect from AMD’s earnings report scheduled for July 28?
Based on 22 analysts, the average price target is $58.29. The consensus earnings per share estimate for Q2 is just 12 cents a share, up from 5 cents last year. That implies an annualized price-earnings of 145.7 times. Still, investors are willing to pay a premium. Ryzen desktops, EPYC server chips and a console refresh set for later this year will accelerate revenue growth to new heights.
On July 21, AMD launched the Ryzen 4000 chips for the desktop. The company said “Ryzen 4000 Series Desktop Processors are built on the industry-leading [7-nanometer] process and ‘Zen 2’ core architecture, offering unmatched user experiences and power efficiency in the state-of-the-art AMD socket AM4 platform.”
The Ryzen 4700G — where G stands for integrated graphics — has eight GPU cores, eight CPU cores and 16 CPU threads. It claims to run at 5% greater single-thread performance than Intel’s flagship i7-9700 chip. AMD will supply the chip for pre-built systems for original equipment manufacturers (OEMs). For now, the enthusiastic DIY community will have to wait.
By offering powerful graphics and chip performance, AMD’s solution will appeal to budget consumers and the corporate market. Companies will no longer have to supply staff with underpowered computers, at least on the graphics processing front.
Could AMD Stock Sell Off After Earnings?
AMD stock has no room to disappoint investors. After rising an astounding 26% in the last week alone, the company must beat on revenue and profit expectations. Despite its technical lead over Intel, AMD’s PC chip sales may not meet expectations. Intel still commands much of the most popular retail sites. For example, Best Buy (NYSE:BBY) and Lenovo (OTCMKTS:LNVGY) promote Intel-powered computers over AMD. Plus, other than in the do-it-yourself market, AMD is a niche player.
In 2019, AMD’s market share in the x86 arena topped 15.5% in Q4 of 2019. So, as Best Buy and Lenovo slowly promote AMD-powered solutions, chip sales will grow steadily.
AMD’s fair value could be as low as around $57. In a 10-year discounted cash flow EBITDA exit model, assume a generous multiple of between 24.1 times and 26.1 times.
| Metrics | Range | Conclusion |
| Discount Rate | 9%-10% | 9.5% |
| Terminal EBITDA Multiple | 24.1x-26.1x | 25.1x |
| Fair Value | $53.37-$60.88 | $57.01 |
| Downside | 12.3%-23.1% | 17.9% |
Model courtesy of Finbox.io (click on this link to change assumptions).
This generous multiple reflects optimistic investor expectations for strong growth over the next few years. It also compares to the analyst revenue forecast.
Similarly, based on its forecast cash flow value, AMD stock is worth $59.01, 15% below its current share price, according to Stock Rover Research.
The Bottom Line: AMD Stock Could Head to New Highs
A revenue forecast raise could send AMD stock to new all-time highs. Advanced Micro Devices might notice stronger demand for notebooks powered by its chips as the lockdown easing continues slowly. Health policy experts will continue encouraging Americans to work from home. And as a result of this, corporations will need to buy more inexpensive systems for staff.
Later this year, when Xbox and PlayStation consoles get an update, revenue for the semi-custom unit will increase sharply. Even though the forward P/E is high, the profit growth from this unit will justify AMD stock’s current valuation.
Lastly, as analysts revise their outlook, they will collectively raise their price targets.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold a position in any of the aforementioned securities.
