Oct 25 2021 - AMD: Brace For Impact
- AMD will be reporting its Q3 results this Tuesday.
- Its revenue for the period could come in around .2 billion.
- The chipmaker's revenue growth momentum could remain at elevated levels in the near future at least.
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AMD (AMD) is scheduled to report its Q3 earnings report after market close tomorrow. Investors would be curious to see if the chipmaker's revenue growth momentum remains at elevated levels or if it fizzles out due to the ongoing semiconductor shortages. But in addition to looking at its headline revenue figure, investors may also want to monitor changes in its average selling prices and shipment volume, track its segment financials and also listen in on its management's guidance for Q4. These items are likely going to have a bearing on where the stock heads next. Let's take a closer look at it all.
Let me start by saying that AMD is facing mixed pricing and volume dynamics across its two largest product categories, that is GPUs and CPUs. For starters, the ongoing semiconductor shortages across the globe has driven up the selling prices for GPUs over the past one year, which benefits both AMD and Nvidia. Although there have been minor corrections in SKU prices from time to time, GPU prices have, overall, continuously risen up. On the other hand, the intensifying competition between Intel (INTC) and AMD has heated over the recent months and it's resulted in a contraction in prices for AMD's Zen 3-based CPUs. Here's a quick look at how prices have evolved for some of AMD's latest SKUs.
(Source: Compiled by author using Amazon's prices over last 3 months)
The chipmaker registered a rapid growth in average selling prices (or ASPs) in last two quarters, but its growth in volume shipments has decelerated over the said time frame. It would be interesting to see how these metrics evolve in Q3.
(Source: BusinessQuant.com, company filings)
There are basically five scenarios that can play out here:
- Its ASP and volume shipment growth remains at elevated levels in Q3, highlighting strong competitive positioning and improving supply situation,
- Its ASP growth remains at elevated levels but its shipment growth stagnates, highlight strong competitive positioning but little to no improvement in its supply situation,
- Its ASPs shrink but its shipments growth accelerates, highlighting an erosion of pricing power due to intensifying market competition and an improvement in its supplies,
- Its ASPs and shipment volume shrinks due to intensifying price wars and semiconductor shortages, resulting in a revenue degrowth. This would highlight an erosion of its pricing power and deteriorating supplies.
- Its ASPs and shipment volume growth remains static, indicating little to no change in its supply situation or its competitive positioning.
Without actually knowing the actual pricing and volume mix for AMD across its various product generations and families, nobody can reliably forecast which of the above cases is going to be prevalent this time around and/or quantify the magnitude of its financial impact for the company as a whole. However, as far as guesstimates go, I contend that AMD's falling CPU prices will offset its rising GPU prices and result in flat ASPs on a sequential basis during Q3.
At the same time, its volume growth is likely to accelerate on the back of growing PC shipments. I say this because Taiwan Semiconductor (TSM), the company that actually manufactures AMD's CPU and GPU chips, shipped wafers in record quantities during Q3. AMD should ideally benefit from this increased supply, unless TSMC diverted it to other customers.
(Source: BusinessQuant.com, company filings)
So, to summarize, keep an eye out on AMD's shipment and volume growth metrics. These items will highlight the state of its supply chain and how it's positioned against Intel and Nvidia.
Assessing the Financial Impact
Having said that, the work-from-home norms instated last year with the onset of COVID-19, had catapulted the demand for personal computing devices across the globe. Analysts were estimating this catalyst to wane off by Q4 2020 but it seems like they underestimated the pent-up demand. Latest data from Gartner and Canalys reveals that shipments for PCs, notebooks and workstations have risen between 6% to 17% on a year over year basis in Q3.
(Source: BusinessQuant.com, Gartner and Canalys)
It's needless to say but these industry tailwinds are likely going to boost AMD's sales in Q3. The bulk of these gains are going to reflect in the chipmaker's computing and graphics segment which includes the sales contribution from PC and notebook end-markets. So, I estimate that this segment will post a high-single digit (~7%) increase in revenue on a sequential basis, which equates to a revenue figure of roughly around .4 billion.
AMD's Embedded, Enterprise and Semi-custom segment is experiencing a different set of tailwinds. Its gaming console partners (Sony and Microsoft) are experiencing breakneck consumer demand and it's likely that they'll be able to bridge the supply-demand gap only in 2022/2023. Besides, major data center companies continue to adopt AMD's EPYC server chips (like here and here). So, altogether, the chipmaker's EESC segment seems well poised to post a yet another set of strong results in Q3. I contend that this segment will post a low-double-digit (~12%) revenue growth on a sequential basis, which equates to a revenue figure of around .79 billion.
(Source: Author's estimates)
Overall, I estimate AMD's total Q3 revenue to be at .2 billion. This is coincidentally in-line with the Street's estimates that span from .98 billion to .21 billion for the quarter.
Lastly, investors should also watch AMD management's Q4 revenue guidance. Its larger rival, Intel, just posted a dismal Q3 earnings report and its management shifted blame on the ongoing chip shortages. It will be interesting to see if AMD's management sees an opportunity of growth here, on the back of Intel's woes, or if it also posts a dismal Q4 guidance due to the ongoing supply shortages. Analysts are forecasting AMD's Q4 revenue guidance to be between .05 billion and .58 billion, which translates to a record revenue high of .31 billion at the mid-point.
It seems like AMD's revenue growth momentum will remain at elevated levels for a couple of more quarters at least, thanks to industry tailwinds. Any market share gains over Intel, along the way, will further contribute to its rapid growth. So, overall, I remain bullish on AMD's prospects. Readers may want to keep a close eye on its segment financials, its ASP and shipment growth, and its management's revenue guidance when it reports its Q3 results. These items will highlight AMD's competitive positioning, changes in its supply situation and how well is the company capitalizing on growth catalysts. Good Luck!