Strong quarterly results and a guidance raise from Advanced Micro Devices (NASDAQ:AMD) confirmed yet again that the company’s prospects are growing. The company posted revenue growing 26.1% from last year. Its earnings beat consensus estimates. Chances are good that AMD stock will trend steadily higher from here.
AMD Stock Rises After Q2 Results
AMD reported revenue of $1.93 billion. Earnings of 13 cents a share (GAAP) beat consensus estimates by a penny. Gross margins of 44% will likely expand. CEO Lisa Su said, “Despite some macroeconomic uncertainty, we are raising our full-year revenue outlook as we enter our next phase of growth driven by the acceleration of our business in multiple markets.”
That level of confidence lifted AMD shares to new highs. The stock broke out from the $50-$55 range the lasted from May 2020 to most of July.
AMD has the performance leadership across multiple segments. It has the Ryzen Zen 2 for desktops, Ryzen for notebooks, Threadripper for the high-end desktop market, Radeon for graphics processing, and EPYC chips targeting the server markets. The CEO said on the conference call “when we talk to our customers, it’s about ensuring that they understand we have a consistent road map that is pushing the leading-edge performance and ensuring that we deliver the performance improvements that we promise.”
By following its road map in the last few years and delivering, AMD is in a strong position to continue taking market share from Intel (NASDAQ:INTC).
Intel Stumbles in Quarter
Intel shares fell from over $60 to below $48 by the end of last week after delaying its 10nm to 7nm product transition. Though it posted second-quarter revenue of $19.7 billion, up 20% Y/Y, it must rely on 10nm product development for growth this year. On its press release, Intel delayed the 7nm CPU launch by six months.
That is akin to a lifetime of a delay in the semiconductor space. This will give AMD a wider lead in the PC market.
Intel said, “The primary driver is the yield of Intel’s 7nm process, which based on recent data, is now trending approximately twelve months behind the company’s internal target.”
Strength in Computing and Graphics Segment
Ryzen processor sales are the primary driver for AMD’s revenue growth. By contrast, graphics processor sales lagged, falling 5% sequentially. GPU ASP fell on a Y/Y and Q/Q comparison due to lower channel sales. The average selling price also fell sequentially. Higher Ryzen mobile processor sales hurt ASP.
Ideally, AMD’s GPU segment is growing similarly to its CPU market. If Intel were to catch up in six months, AMD will have the gaming market to lean on. Still, the over 50 Ryzen 4000 notebooks launched should keep AMD ahead of Intel in the near-term.
On its balance sheet, AMD holds $1.775 billion in cash, up from $1.13 billion last year. Looking ahead, it forecasts gross margin inching slightly to 45%. Investors may accept operating expenses at 29% of revenue. In its expansionary phase, AMD will need to invest back in the business to widen its lead over Intel.
Valuation and Your Takeaway
Investors may assume AMD will grow revenue by 32% this year. It will grow by between 26-32% after that in a 5-year discounted cash flow model.
|Discount Rate||10.0% – 9.0%||9.5%|
|Terminal Revenue Multiple||5.9x – 6.9x||6.4x|
|Fair Value||$86.73 – $103.80||$95.11|
Apply the above metrics, AMD has a fair value of $95.00. After Intel delayed its 7nm release, AMD will more likely report sales growing above my conservative estimate.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.