AMD earnings are causing quite the bullish party on Wall Street. Significant growth in the PC, gaming, and cloud server business is the driving catalyst for the bullish forecast. Advanced Micro Devices (NASDAQ: AMD) releases Q3 earnings on the 27th of October. Options activity, analysts, and current financials all point towards expected or better than expected earnings. Think of it as all the AMD balloons, cake, and music are ready and investors are waiting for the party. However, an AMD earnings investment does hold risks, which we look to explore.

Table of contents 

  1. Why are investors bullish about AMD earnings? 
  2. Bears are raising some valid concerns 
  3. Summary of the AMD Q3 earnings forecasts 

Bullish indicators on AMD earnings – Q3 2020

Management

AMD management, in particular CEO Lisa SU, holds a bullish outlook for Q3 earnings and beyond for two reasons. These include a strong roadmap and forecasted growth in market share.

The uptick in gaming consoles is increasing the appetite for AMD’s CPU chips. Especially from Playstation and Xbox. According to Lisa, “[They] expect strong second-half semi-custom growth as [they] read production to support the holiday launches of the new Playstation 5, and Xbox Series X consoles”. The married-like relationship between AMD CPU’s and gaming consoles should see market share grow in Q3 and beyond. (opinion not advice)

Moreover, Lisa’s long-term vision for AMD is acting like a bull vacuum. Some pessimists would say it is easy to talk a big game. However, AMD reached its long-term milestone of double-digit market share in Q2. Thus, it is fair to say AMD management is dedicated to achieving its long-term goals.

Financials

AMD’s impressive 2020 financial show is making investors bullish for Q3 earnings. Especially in the areas of revenue, earnings, Return on Equity (ROE), and Earnings Per Share (EPS) growth.

Explosive growth in the PC, gaming, and cloud server markets drove up AMD’s revenue by 7% between Q1 to Q2. The acceleration of the digital economy is making PC’s essential and gaming consoles a preferred method of entertainment. Consequently, investors expect AMD’s Q3 revenue to be bullish and beat Q2 results. For example, an average of 36 analysts is forecasting AMD’s revenue to reach $8.9 billion by the end of 2020. If this estimate comes to fruition, revenue will climb 4-8% come Q3. (opinion not advice)

Despite AMD’s earnings growth lagging behind revenue, investors remain optimistic for Q3. Analysts expect AMD’s profitability to grow by 300% over the next year. If true, Q3 earnings would likely outperform Q2 earnings. While forecasts remain bullish investors should not ignore the fact that AMD’s earnings decreased between Q1 and Q2. The driving factors were $168 million in unusual profits and the increase in share dilution. However, it seems the Q2 problems are unlikely to resurface. Because “unusual items are often one-off in nature”, and AMD are forecasting consistent EPS growth.

Lastly, AMD is displaying a strong future ROE heading into Q3 earnings. AMD’s current ROE is 18.4%. Some investors might consider 18.4% low as it is below the general benchmark of 20%. However, AMD’s future ROE of 34% over the next three years is showing strong bullish signs. The buoyant outlook is understandable as the fast-growing gaming console, PC, and cloud sever industries should see AMD’s profits rise. Not to mention, the growing demand will fuel more sales, and pent-up demand does not cost AMD anything.

Analyst projections

The sentiment among AMD analysts remains neutral to bullish. According to the September update, 15 analysts recommend buying, 20 suggest holding, and three advise selling. The analyst consensus held steady since June, indicating little to no sentiment deviation before earnings. (opinion not advice). Analysts are projecting EPS to come in at $0.35 and sales to be $2.6 billion.

Options Activity

October options are slightly bullish. Mainly because the call volume for strike prices between $82-90 far outweighs the corresponding put volume. Bullish options before earnings suggest that Q3 results are at least on par with analysts or better than expected. (Opinion not advice) However, it is essential to note that unusual bearish options activity could spring up days before earnings. Thus, monitoring the options chain in the lead up to earnings, the 27th of October, is crucial for mitigating risk.

A bearish outlook on AMD earnings forecast

Financials

The areas of financial concern include contracting revenue growth, an overvalued P/E ratio, and debt.

Digital disruption gave AMD’s revenue steroid-like growth. However, as the world normalises bearish investors expect AMD’s revenue growth rate to pullback. There is weight to the argument. However, the contraction, if true, is likely to be temporary. Because AMD management intends to aggressively increase market share in the PC, cloud server, and console industries over the long-term.

Despite low debt levels investors should still examine whether AMD can service its debt. AMD’s debt and liabilities currently sit around $3.2 billion. However, AMD has $1.8 billion in receivables and cash, respectively. Hence, AMD can cover its debt with cash flow without digging into profit. Not to mention not all the $3.2 billion is due now. Also, AMD’s decision to reduce debt and increase equity saw its D/E ratio improve to 19.6% last quarter. Overall, if AMD continues down the equity route and bolsters its balance sheet from Q3 onwards than debt will not add much risk to an investment. (Opinion not advice)

A high P/E ratio is making some investors sceptical about AMD’s future profits. The current P/E multiple for AMD is 153.7x. At face value, a high P/E ratio is good because it indicates higher earnings in the future. However, the semiconductor industry and the US market hold an average P/E of 35.2x and 18x. Some investors may interpret the massive disparity to mean AMD is overvalued.

Management

One of management’s biggest concerns is making sure competitors such as Intel and Nvidia do not gain a competitive edge. It is dangerous to rule out competitors, especially in the cut-throat semiconductor business. Thus, it would be smart to compare the flagship and diversified products amongst AMD, Intel, and Nvidia before investing.

Summary of AMD earnings forecasts – YIG Takeaway

Before I begin, I remind our viewers that this is not financial advice. Instead, the information above is investment commentary from extensive research.

AMD is well-positioned to report robust Q3 2020 earnings. The bullish options activity, financial forecasts, and analyst recommendations support an optimistic outlook. Not to mention, the growing PC, gaming, and cloud server industries should catapult AMD’s financials into uncharted territories. An AMD investment is not without its risks. Especially in the competition, overextended revenue growth, and overvaluation departments. Overall, the bullish arguments outweigh the bearish arguments heading into AMD Q3 earnings. (opinion not advice).

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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

Written by Patrick McLoughlin, Senior Manager of YIG.

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