Santa Clara, California-based Advanced Micro Devices (NASDAQ:AMD) is expected to report second-quarter earnings on July 28 after the close of market. Year-to-date, AMD stock is up nearly 34% — which technically means it is in a bull market. By comparison, the widely followed iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is up about 14%.
Although chip stock like AMD were among those shares that sold off rapidly in the novel coronavirus triggered selloff during February and March, most chip stocks have had a remarkable comeback since hitting 52-week lows in late March. In fact, on March 18, AMD shares hit a 2020-low of $36.75. Now, they are around $61. Put another way, they are up an eye-popping 58%. If you were enough to invest $1,000 in the company then, you’d now have about $1,600.
Today, I’d like to take a closer look at the outlook for the company for the rest of the year. We’re in the midst of a busy earnings season. Many semiconductor stocks will report earnings in the coming weeks. Weaknesses in their fundamental metrics or even a potential warning by one of the large-caps for future quarters could affect the overall industry. However, in the long-run, I remain bullish on the future of the semiconductor industry and AMD shares.
Therefore, investors should regard any dip in price as an opportunity to buy AMD stock. And here’s why.
Semiconductor Industry Is Important
Semiconductors are the brains inside electronic devices. Chips are used in a wide range of products in computing, telecommunications, gaming, transportation, military systems and healthcare. They are typically behind technology innovation, and as a result, shares of semiconductor companies usually act as a bellwether for the technology sector as a whole.
In turn, InvestorPlace readers are likely to be familiar with how the semiconductor industry is cyclical. During periods of high demand, upturns occur. There may also be supply shortages, which lead to higher prices and revenue growth. Thus, profits of chip companies may ebb and flow dramatically. It’s never easy to know whether the downside of a given cycle might take longer than previously expected.
At present, the current health and economic environments in the U.S. and globally present an array of uncertainty. For most semiconductor companies, China is both a consumer and a supplier. China consumes more than 50% of all semiconductors made worldwide. Furthermore, many U.S. technology companies either have manufacturing plants in China or use Chinese companies in their supply chains. Therefore, outlook form both the U.S. and China will be important in the rest of the year.
Yet, in the coming years, new frontiers in technology — such as the internet of things (IoT), artificial intelligence (AI), autonomous driving, and 5G — will likely turbocharge many semiconductor shares, including AMD stock.
That said, the company’s two main competitors are Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA). Therefore, potential shareholders may also want to pay attention to these two stocks.
What to Expect from Q2 Earnings
Advanced Micro Devices was founded in 1969 as a Silicon Valley startup focusing on leading-edge semiconductor products. Today, it has grown into a global chip company with a focus on developing high-performance computing and visualization products. It is also number 460 on the Fortune 500 company list.
In late April, the company released Q1 results. It had revenue of $1.79 billion, operating income of $177 million and net income of $162 million. Moreover, diluted earnings per share came at 14 cents compared to diluted earnings per share of 1 cent year-over-year and 15 cents in the prior quarter. Finally, gross margin was 46% — up 5 percentage points YOY and 1 percentage point quarter-over-quarter, primarily driven by Ryzen and EPYC processor sales.
The company reports in two segments:
- Computing and Graphics (revenue was $1.44 billion, up 73% YOY and down 13% quarter-over-quarter);
- Enterprise, Embedded and Semi-Custom (revenue was $348 million, down 21% YOY and 25% sequentially).
In total, Q1 revenue was 40% YOY primarily driven by higher Computing and Graphics segment revenue. Yet, revenue was down 16% quarter-over-quarter due to lower revenue in both segments.
That said, CEO Dr. Lisa Su had this to say about the company’s performance:
“We executed well in the first quarter, navigating the challenging environment to deliver 40 percent year-over-year revenue growth and significant gross margin expansion driven by our Ryzen and EPYC processors. While we expect some uncertainty in the near term demand environment, our financial foundation is solid and our strong product portfolio positions us well across a diverse set of resilient end markets…. Our strategy and long-term growth plans are unchanged.”
So when Advanced Micro Devices reports next week, the Street would like to see strong revenue numbers. It’d also like to get a better feel for the outlook in the rest of the year.
The Bottom Line on AMD Stock
We are entering a busy earnings season. As a result, and given the recent stellar increase in the prices of many semiconductor stocks, there may likely be short-term volatility and profit-taking in the sector.
However, long-term investors can regard any dip in AMD stock, especially toward the $50-level, as a good opportunity to buy into the shares. Its 52-week price range has been $27.43-$59.27.
During the bull run of the past decade, semiconductor stocks have been essential drivers of the broader technology sector’s upside. I believe a similar story will likely unfold in this decade, too.
And in 2-3 years, I expect AMD stock to reach $100.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
