AMD Q2 preview: Where next for AMD stock?

When will AMD release Q2 earnings?

Advanced Micro Devices, better known as AMD, is scheduled to release second quarter earnings after US markets close on Tuesday August 2. A webcast will be held on the same day at 1400 PDT.

AMD Q2 earnings consensus

Wall Street forecasts AMD will report a 70% jump in revenue from last year to $6.5 billion, bang in the middle of the company’s guidance range, and a 66% rise in adjusted EPS to $1.05.

AMD Q2 earnings preview

It is set to be yet another record-breaking quarter for chipmaker AMD, with revenue forecast to surpass the all-time high of $5.9 billion in the first three months of 2022. The fact earnings are expected to rise by two-thirds is all the more impressive considering the tough comparatives from the year before, when earnings more than trebled.

The strong growth is expected to be the result of higher demand for its products, improved profitability and the acquisition of Xilinx that was completed in February, which marked the largest takeover ever in the semiconductor space and provided a major new catalyst in 2022. Notably, the pending purchase of Pensando could provide further momentum once the deal has closed.

Demand for AMD’s chips used in computers and graphics cards has never been greater and sales are forecast to rise 23% in the second quarter to $2.8 billion, just below the record sum delivered in the first, while operating income is poised to rise 26% from last year to $660.9 million but dip from the record figure seen in the last quarter.

AMD’s other main division providing semiconductors for embedded processors, games consoles and other system-on-chips is expected to see a much faster 68% jump in sales to $2.6 billion, while operating income is estimated to increase 71% to $679.4 million.

The company said it is aiming to deliver an adjusted gross margin of 54% in the second quarter and analysts believe it will achieve this goal, growing from 48% in the first. Profitability is improving as AMD focuses on the high-end server market where businesses pay premium prices. Notably, both Xilinx and Pensando should bolster AMD’s position in this higher-margin enterprise segment. Plus, demand from large businesses is expected to prove more resilient compared to the one making chips for consumer devices during any downturn going forward, helping provide some confidence that cashflow and earnings can hold up even if there is a drop-off in some demand following the boom experienced in recent years during the supply crunch.

For example, we saw just this week that Qualcomm, which makes over half of its sales making chips for smartphones, warned it was bracing for a slowdown and said it now expects smartphone sales to fall 5% in 2022, having previously thought they would remain broadly flat. Micron delivered an unwelcome surprise when it said in early July that inflation was causing a pullback in spending and warned the market had ‘weakened considerably in a very short period of time’. TSMC, the world’s largest chipmaking subcontractor in the world, has also seen major clients cut orders for the rest of 2022, according to media reports, not only due to lower demand but also because of a supply glut for certain chips.

Meanwhile, BE Semiconductor – which makes key equipment and packaging to those that make chips – warned revenue will be some 20% to 30% lower in the third quarter compared to the second amid softer demand, suggesting semiconductor makers are drastically cutting back on output. BE Semiconductor said a pullback in orders from China was primarily to blame, which is where a lot of chips designed by the likes of AMD are produced.

‘Whether current market softness is a temporary pause or more prolonged in duration is difficult to tell at present given the many conflicting economic, geopolitical and industry cross currents,’ said BE Semiconductor CEO Richard Blickman as the firm delivered its latest results last week.

Although markets are bracing for a slowdown in demand from the consumer-led side of the market, concerns are also starting to emerge over the strength of the enterprise market led by cloud-computing, data centres and servers. BofA Securities warned this month that this could be the ‘next shoe to drop in rolling correction’ and said while demand should hold up for the rest of 2022, we could see overall sales drop as much as 10% in 2023. Any slowdown here would deal a much bigger blow to AMD compared to the softness being seen in sales of electronic consumer devices.

That is reinforced by the latest results out from Intel, which has been losing ground to AMD in recent years. The world’s largest PC processor maker was hurt by the drop-off in demand for computers as expected, but a 16% slide in sales for data centre and server chips was an unwelcome surprise.

There is consensus that the long-term growth story remains intact as the world continues to adopt more technology but the concerns that have severely knocked the share prices of semiconductor stocks this year are based on cyclical fears as rising interest rates, rampant inflation, supply-chain disruption, weakening consumer confidence and the war in Ukraine all weigh on the industry’s near-term prospects.

With this in mind, AMD’s outlook for the remainder of the year will be critical in how markets receive the update. The company already made a significant upgrade to its guidance in the previous quarter, when it said it was now aiming to deliver 60% sales growth in 2022 compared to its original goal of just 30%. It also said its adjusted gross margin would be better than first thought at 54% versus the initial target of 51%. A reiteration would be warmly welcomed in the current environment.

It is also worth noting that chipmakers have found support recently after the US Senate passed a long-awaited bill designed to give up to $52 billion worth of subsidies and support to those looking to build new factories in the country as it looks to wean itself off relying on the likes of China and Taiwan. This has been regarded as good news for US firms, although it is set to disproportionately benefit those that manufacture their own chips like Intel, Texas Instruments and Micron over those that design their own chips but get overseas partners to manufacture them such as AMD and NVIDIA. This is set to be signed into law by president Joe Biden before the end of the first week in August, according to the latest media reports.

Where next for AMD stock?

AMD shares have risen over 21% since hitting a two-year low in early July, providing hope to investors that the stock is gaining momentum following the heavy selloff seen across the tech industry in 2022.

The stock has just recaptured the 50-day moving average, but the 100-day figure that is currently sat at $95 should be treated as a more significant ceiling considering it has struggled to break above here for over six months. Once this is reclaimed, shares can look to return above the $100 threshold and bring the $102 level of support-turned resistance seen since March. It can then try to surpass the June-high at $109.50 before the 200-day moving average at $113 comes into view. The 42 brokers that cover the stock see slightly greater upside potential over the next 12 months with an average target price of $128, which has not been seen since last February.

The RSI has trended higher into bullish territory over the last couple of weeks. Although we have seen a decline in trading volumes over the last 20 days, there are signs that this could be increasing again and could be bolstered by renewed interest once the results are released.

Investors will hope that the 50-day moving average at $89 can hold as a new initial floor going forward, but the stock could slide back toward the bottom of the last (and rather short) leg lower at $85. The $80.50 level of support is likely to prove more significant, although the two-year low at $71.60 should be treated as the ultimate level of support over the short-term.

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