Advanced Micro (AMD) Up 13.5% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Advanced Micro Devices (AMD). Shares have added about 13.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Advanced Micro due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

AMD Q3 Earnings & Revenues Beat Estimates, Set to Buy Xilinx

Advanced Micro Devices reported third-quarter 2020 non-GAAP earnings of 41 cents per share, which surpassed the Zacks Consensus Estimate by 14%. Notably, the bottom line soared 125% both year over year and sequentially.

Revenues of $2.80 billion outpaced the Zacks Consensus Estimate by 9.5%. The figure surged 56% year over year and 45% sequentially.

The company also announced that it has entered into a definitive agreement to acquire Xilinx for $35 billion in an all-stock transaction. The buyout will significantly help in expanding AMD’s data center business.

Quarter Details

Computing and Graphics segment’s revenues of $1.67 billion increased 31% year over year and 22% sequentially. This can be attributed to robust adoption of Ryzen processors.

Client processor average selling price (ASP) was lower year over year owing to a higher mix of mobile processor sales. Sequentially, ASP increased due to higher desktop and mobile processor ASPs.

GPU ASP was lower year-over-year due to product cycle timing. However, it increased sequentially due to favorable product mix.

Enterprise, Embedded and Semi-Custom segment’s revenues of $1.13 billion were up 116% year over year and 101% sequentially. The growth was driven by higher semi-custom product sales and increased EPYC processor sales.

Non-GAAP gross margin expanded 100 basis points (bps) on a year-over-year basis to 44%, driven by strong EPYC and Ryzen processor sales.

Non-GAAP operating expenses increased 31% year over year to $706 million. However, as percentage of revenues non-GAAP operating expenses declined 500 bps.

Non-GAAP operating income jumped 119% year over year to $501 million primarily driven by increase in Ryzen and EPYC processor sales and semi-custom product sales.

Non-GAAP operating margin expanded 600 bps on a year-over-year basis.

Segment wise, Computing and Graphics operating income was $384 million, compared with $179 million reported in the year-ago quarter courtesy of higher Ryzen revenues.

Enterprise, Embedded and Semi-Custom operating income was $141 million compared with $61 million reported in the year-ago quarter.

Key Q3 Developments

AMD introduced the AMD Ryzen 5000 Series desktop processors during the reported quarter.

Moreover, Oracle announced plans to offer cloud instances based on next-generation AMD EPYC processors, codenamed “Milan.”

Further, AMD and Apple announced the availability of new AMD Radeon Pro 5000 series GPUs for the updated 27-inch iMac.

Balance Sheet & Cash Flow

As of Sep 26, 2020, AMD had cash and cash equivalents (including marketable securities) of $1.77 billion compared with $1.78 billion as of Jun 27, 2020.

As of Sep 26, 2020, total debt (long-term plus short-term) was $373 million, down from $690 million as of Jun 27, 2020.

Operating cash flow was $339 million compared with operating cash flow of $243 million in the second quarter.

Free cash flow was $265 million in the third quarter compared with free cash flow of $152 million in the previous quarter.

Guidance

For fourth-quarter 2020, AMD expects revenues to be roughly $3 billion (+/- $100 million) indicating an increase of approximately 41% year-over-year and 7% sequentially. Non-GAAP gross margin is anticipated to be 45%.

For 2020, AMD now expects 2020 revenues to grow by approximately 41% over 2019, much better than previous expectation of 32% growth. Non-GAAP gross margin is still expected at 45%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 19.33% due to these changes.

VGM Scores

At this time, Advanced Micro has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Advanced Micro has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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