Why Is Advanced Micro (AMD) Down 1.7% Since Last Earnings Report?

It has been about a month since the last earnings report for Advanced Micro Devices (AMD). Shares have lost about 1.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Advanced Micro due for a breakout? 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 Q1 Earnings Match Estimates, Revenues Up Y/Y

Advanced Micro Devices reported first-quarter 2020 non-GAAP earnings of 18 cents per share, which matched the Zacks Consensus Estimate. Notably, the bottom line improved 200% year over year but declined 43.8% sequentially.

Revenues of $1.79 billion surpassed the Zacks Consensus Estimate by 0.4% and surged 40% year over year. However, the top line declined 16% sequentially.

Strength in Computing and Graphics, and Enterprise segment drove year-over-year improvement.

Segmental Details

Computing and Graphics segment (80.4% of total revenues) revenues of $1.44 billion, improved 73% year over year. This can be attributed to robust adoption of Ryzen and Radeon processors. The figure declined 13% sequentially thanks to sluggish graphics processor sales.

In desktop vertical, seasonal uptick in demand for second and third generation Ryzen processors across retailers and e-tailers drove segment results. However, sluggishness in China, owing to coronavirus crisis-induced lockdowns, weighed on PC-related sales.

Client processor average selling price (ASP) improved year over year on higher Ryzen processor sales. Client processor ASP declined sequentially on account of higher notebook sales.

In mobile domain, unit shipments grew double-digit on a year-over-year basis. Revenues from Notebook processors benefited from continued demand for previous generation products and increasing traction of Ryzen 4000 mobile processors.

Management also remains optimistic regarding growing clout of Ryzen 4000 mobile processors families across leading OEMs. Markedly, Ryzen 4000 mobile processors powered laptops from HP, Dell, Lenovo and other major OEMs, slated for release in 2020, are expected to help AMD in expanding presence in the commercial market. ASUS and Acer have already launched notebooks based on the AMD Ryzen 4000 Series mobile processors.

The latest AMD Ryzen PRO 4000 Series mobile processors are witnessing traction across leading commercial OEMs. Lenovo is set to leverage the processors in its ThinkPad T series, X series and L series of business notebooks, while HP has rolled out new “enterprise-ready” ProBooks.

In graphics domain, higher sales of Radeon RX 5000 series GPUs based on RDNA architecture drove double-digit growth in unit shipments and revenues on a year-over-year basis. However, GPU ASP declined on a year-over-year basis and sequentially due to product mix.

Management notes that the company is on track to launch next-generation gaming GPUs, enhanced with a 50% increase in performance per watt over the existing products, later in 2020.

Moreover, desktop channel sales increase was driven by robust utilization of Radeon RX 500 series GPUs and new processors based on 7 nanometer (nm) RDNA architecture.

Management noted that Data Center GPU business is making progress. The company inked new deal wins in cloud, game streaming and VDI verticals in the reported quarter.

Enterprise, Embedded and Semi-Custom segment (19.4% of total revenues) revenues of $348 million were down 21% year over year and 25% sequentially.

The decline can primarily be attributed to lower semi-custom product revenues, partially offset by higher EPYC server processor sales.

In server domain, unit shipments improved by double-digit growth on a sequential basis and more than tripled on a year-over-year basis. Strength in AMD’ latest EPYC processors are enabling the company to win new deals from major enterprise, cloud, and HPC companies.

In cloud vertical, AMD’s second gen EYPC processors witnessed traction across IBM, Google Cloud Platform and Microsoft Azure. Moreover, major cloud players utilized server processors to meet accelerated demand for collaboration services induced by coronavirus-led work-from-home wave and increased use of online schooling solutions.

In enterprise domain, AMD rolled out new high-performance processors to support complex applications, advanced modeling, database and hyper-converged workloads.

Considering HPC vertical, Lawrence Livermore National Laboratories intends to use AMD’s second Gen EPYC processors and Radeon Instinct GPUs to power El Capitan supercomputer.

Management is optimistic on increasing utilization of AMD CPUs and GPUs across supercomputing systems.

Operating Details

Non-GAAP gross margin expanded 500 basis points (bps) on a year-over-year basis to 46%, driven by strong adoption of EPYC and Ryzen processors.

Non-GAAP operating expenses on a non-GAAP basis increased 7.2% year over year to $584 million, due to higher investments in Research & development (R&D) and go-to-market initiatives.

R&D expenses rose 18.5% year over year to $442 million. Marketing, general and administrative expenses climbed 17.1% year over year to $199 million.

Adjusted EBITDA soared 133.8% year over year to $304 million on earnings growth.

Non-GAAP operating income came in at $236 million, up 181% year over year. Rising revenue base, and higher contribution from EPYC and Ryzen processors sales drove year-over-year improvement.

Segment wise, Computing and Graphics operating income was $262 million, compared with $16 million reported in the year-ago quarter courtesy of higher revenues. Enterprise, Embedded and Semi-Custom loss was $26 million against an operating income of $68 million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Mar 28, 2020, AMD had cash and cash equivalents (including marketable securities) of $1.39 billion compared with $1.50 billion as of Dec 28, 2019.

As of Mar 28, 2020, total debt (long-term plus short-term) was $488 million, up from $486 million as of Dec 28, 2019.

Operating cash outflow was reported at $65 million, against $442 million generated in the previous quarter.

Free cash outflow was $120 million against free cash flow of $400 million in the prior quarter.

Guidance

AMD expects second-quarter 2020 revenues to be roughly $1.85 billion (+/-$100 million), indicating year-over-year and quarter-over-quarter growth of 21% and 4%, respectively.

For second-quarter 2020, AMD expects robust sales from Ryzen and EPYC processor to drive year-over-year revenues. Further, sequential increase in revenues is anticipated on account of growth in EPYC processor and semi-custom sales.

Semi-custom revenues are projected to gain from production increase to support the launch of the latest Xbox Series X and PlayStation 5 gaming consoles scheduled for holiday season of 2020.

Non-GAAP gross margin is anticipated to be 44%.

For 2020, AMD projects revenues to grow 25% (+/-5%) over 2019 amid weak demand environment induced by the coronavirus crisis. Non-GAAP gross margin is anticipated to be 45%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -28.13% due to these changes.

VGM Scores

Currently, Advanced Micro has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Advanced Micro has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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