AMD earnings: what to watch out for?

Key learning points

  • Analysts estimate adjusted earnings per share at $0.47 versus $0.13 in the second quarter of 2020.
  • Gross margin is expected to increase YOY.
  • Sales are expected to record the second fastest growth in more than four years, driven by rising demand and market share gains.

Advanced Micro Devices Inc. (AMD) has enjoyed skyrocketing demand for its semiconductors and computer processors as millions of people have worked remotely during the COVID-19 pandemic. Despite a global chip shortage, some analysts say AMD has lost market share to rival Intel Corp. for the first time in 15 years. (INTC) takes away.

Investors will look to see if AMD can maintain its robust growth when the company reports earnings on July 27 after the market close for Q2 FY 2021. Analysts expect adjusted earnings per share (EPS) year-over-year (YOY) to more than triple as revenue nearly doubles. AMD has performed well due to strong demand during the global chip shortage, even though it is a “fableless” chipmaker and does not make the silicon wafers or chips in its products.

Investors will also focus on the company’s gross margin, an important metric in the semiconductor industry that measures the degree of operational efficiency in a company’s operations. Analysts estimate AMD’s gross margin YOY will improve significantly, reaching its highest level in at least 18 quarters.

Shares of AMD took off in July 2020 and have far outperformed the broader market in the past year. AMD stocks retreated sharply in February, recouping some of their losses in late April and then falling to lower lows in mid-May 2021 after first-quarter 2021 earnings were reported. The stock briefly underperformed the market. Since the May low, AMD stocks have recovered and are now solidly outperforming the S&P 500. As of July 21, 2021, AMD stocks have delivered a 1-year total return of 56.9%, well above 33.8% for the S&P 500.

Source: TradingView.

AMD earnings history

AMD-adjusted earnings per share have grown at a breakneck pace for most of the past four years, with YOY falling in this area only in the first and second quarters of 2019. In the first quarter of FY 2020, which represents the first part of the pandemic, adjusted earnings per share were up more than 600% year over year. Adjusted EPS continued to grow rapidly during the pandemic, albeit at a slower pace in subsequent quarters. Analysts now estimate that adjusted earnings per share YOY will nearly quadruple in at least 18 quarters for the second quarter of 2021 to its highest level in at least 18 quarters.

AMD’s revenue growth has been just as consistent. In the past 18 quarters, the company has recorded only two bouts of YOY declines. Three of the top four quarters, measured by YOY sales growth, have occurred in the three most recent quarters. Analysts expect Q2 FY 2021 to continue this trend as sales rise more than 85% YOY. At that rate, revenue could be more than three times what it was four years ago in the second quarter of 2017.

Key AMD Statistics
Estimate for Q2 FY 2021 Q2 FY 2020 Q2 FY 2019
Adjusted Earnings Per Share $0.47 $0.13 $0.04
Revenue (billions) $3.6 $1.9 $1.5
Gross profit margin 47.0% 44.0% 40.7%

Source: Visible alpha

The most important statistic

As mentioned above, investors will also be looking at AMD’s gross margin. This important metric measures gross profit, sales minus cost of goods sold, as a percentage of total sales. A company can increase its gross margin by either increasing sales or decreasing costs, or a combination of both. Computer processor chips are essentially basic goods, with little difference in quality between chips manufactured by different companies. This means that producers have little price power, so the main way to increase margins is to keep costs down, especially during periods of weak sales. At the same time, keeping companies lean also allows computer chip chips to maximize their profits when demand is high. With the current shortage of semiconductors, the cyclical nature of the industry could have an impact on AMD on the supply side, as the company does not make the raw materials for silicon chips itself, and on the demand side, as the demand for processors rises significantly.

AMD’s gross margin has continued to increase in recent years. Four years ago, in the second quarter of 2017, the gross margin was 33.6%. It rose to 37.2%, 40.7% and 44.0% respectively in the second quarters of 2018, 2019 and 2020. Now, analysts predict gross margin will rise to 47.0%, the highest level in at least more than four years.