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Owing to consistent headwinds with the chip supply chain and a declining PC market, semiconductor giant Advanced Micro Devices (AMD) has lost roughly 30% of its value over the past year. The company, however, has the benefit of a strong management team that continues to make the best of the challenging macro environment.
AMD will report fourth quarter fiscal 2022 earnings results after the closing bell Tuesday. Investors will look to see whether its streak of earnings beats can continue. Last week, while citing a declining PC market that continues to deteriorate, analyst Stacy Rasgon downgraded AMD to Market Perform from Buy, while reducing 12-month price target to $80 from $95. “In recent months we have been growing more wary of potential PC dynamics,” Rasgon wrote in a note to clients. Rasgon also noted that new PC parts from AMD have seen “heavy discounts” at retail since being launched less than two months ago.
This has the potential to impact the company’s gross margins, especially when factored with rising inflationary costs. This has been the trend in recent quarters as the company attempts to navigate various headwinds related to supply chains, declining PC demand and inflationary impacts on its high-margin enterprise business. However, assuming the company’s growth metrics remains intact in Q4 and upward guidance for Q1, this would present a great buying opportunity for AMD stock.
For the three months that ended December, Wall Street expects the California-based company to earn 67 cents per share on revenue of $5.5 billion. This compares to the year-ago quarter when earning were 92 cents per share on $4.83 billion in revenue. For the full year, earnings are expected to rise 25.8% year over year to $3.51 per share, while full-year revenue of $23.51 billion would rise 43.1% year over year.
The strong forecast for top and bottom line figures for the quarter and full year underscores the strength that still exists in AMD’s business despite the recent setbacks within the PC market and datacenter and enterprise business segments where demand has moderated. Nevertheless, with the GPU (graphic processing unit) industry expected to surge close to 34% annually in the next five years, while the data center industry is expected to grow at a compound annual rate of 10.5% through 2030, AMD has multiple levers to pull.
AMD should continue to enjoy strong growth trends within its most important segments, which will presents tons of pricing power not only when it comes to supply chains, but also with consumer demand. In the near term, the company will look to bounce back from a challenging third quarter, when it missed on both the top and bottom lines with Q3 adjusted EPS of 67 cents which was 3 cents shy of estimates, while Q3 revenue of $5.57 billion missed by $84 million, despite rising near 30% year over year.
The revenue miss was driven by a declining PC market which forced the company to be aggressive in lowering prices to move its inventory. AMD’s client segment revenue, which includes PC sales, fell 40% year over year to $1 billion. There was also a noticeable deceleration in the data center revenue which rose 45% year over year to $1.6 billion. While that number appears strong, it compares with growth of more than 80% two quarters earlier.
Likewise, although the Q3 Gaming revenue was strong, rising 14% year over year, it slowed from 32% in Q2. The company, however, provided solid Q4 guidance, suggesting the Q3 struggles were temporary. For the stock to recover, AMD on Tuesday must deliver top and bottom line beat with strong guidance for the next quarter and full year.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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