AMD Q3 earnings preview: Where next for AMD stock?

When will AMD release Q3 earnings?

Advanced Micro Devices is scheduled to release third quarter earnings after the markets close on Tuesday November 1. A conference call will be held at 1400 PT, or 1700 ET.

AMD Q3 earnings consensus

Wall Street forecasts revenue will rise 31% from last year in the third quarter to $5.7 billion and adjusted EPS is expected to fall 7.2% to $0.68.

AMD Q3 earnings preview

AMD warned in early October that revenue would be considerably lower in the third quarter than previously anticipated. It downgraded its expectations and said sales would amount to around $5.6 billion compared to the previous goal of around $6.7 billion.

It laid most the blame on weaker demand from its Client segment, which homes its processors made for computers and laptops.

‘The PC market weakened significantly in the quarter,’ said chair and CEO Lisa Su. ‘While our product portfolio remains very strong, macroeconomic conditions drove lower than expected PC demand and a significant inventory correction across the PC supply chain’.

Consumers splashed out on new tech whilst they were stuck at home during the pandemic while businesses also had to spend more on hardware to facilitate the rise in remote working for employees. However, this surge in demand is now unwinding as consumers have the tech they need and are becoming more conscious about spending as a recession looms, while businesses are also spending less as offices reopen. Plus, having overcome the worst of the supply chain disruption we have seen this year, some end markets are now flooded with chips at a time when demand is faltering.

This isn’t a problem specific to AMD. Its rival NVIDIA issued a similar warning around two months before AMD raised the warning flag, having also wiped around $1 billion off its third quarter revenue expectations due to weaker demand for gaming hardware like consoles. The alarm bells have been ringing across the industry for months now, sending the Philadelphia Semiconductor Index down to its lowest level in over two years less than a couple of weeks ago.

The expected result for AMD is set to be a 35% year-on-year drop in revenue from its Client segment this quarter, which will be countered by growth from its other divisions. Notably, this is forecast to be the second consecutive quarter of slower sequential topline growth and the slowest year-on-year growth in over two years. Below is a breakdown of what to expect from each segment in the third quarter and how that compares to the results seen over the past year:

(Source: Estimates from Bloomberg)

While its other divisions supplying chips for data centres is expected to prove more resilient, there are signs that this has also peaked considering markets anticipate a second consecutive quarter of lower sequential revenue over fears that businesses have also started to pullback on spending.

Sales of chips for gaming are forecast to rise from last year and hold largely steady from what we saw in the last quarter, which would be welcomed considering other rivals have suffered sharp declines in this area. Still, growth is undoubtedly slowing and this will remain an area of concern considering sales are forecast to start declining in the fourth quarter.

AMD’s embedded processors, powered by Ryzen and EPYC chips that are used in networking and data storage as well as by the automotive industry, will help counter the slowdown considering sales were immaterial this time last year, although once again we can see that markets anticipate tepid growth in the third quarter compared to the second.

Meanwhile, adjusted earnings are forecast to decline for the first time in more than three years this quarter. Although AMD has improved its gross margin in recent years, its operating margin is forecast to come in at just 20.5%, which would mark its lowest level since the start of 2021. R&D expenses are expected to be some 67% higher this quarter than last year and operating costs are forecast to be some 48% higher. Those rising costs, twinned with slower sales growth, is weighing on the bottom-line.

(Source: Estimates from Bloomberg)

The outlook will prove highly influential as markets brace for the weaker prospects stemming from the slowdown in consumer electronics to continue, with fears that worse is to come considering many believe a recession could be just around the corner.

Wall Street currently believes the Client segment will continue to struggle over the coming quarters and that gaming will start to see a drop-off in sales in the fourth. Wall Street forecasts overall revenue growth will slow to 22% in the final three months of 2022 to $5.7 billion and that adjusted EPS will drop over 13% to $0.80. Markets believe revenue and earnings will continue to decline throughout the first half of 2023 before returning to growth in the second.

Where next for AMD stock?

AMD shares appear to have found a floor after falling to their lowest level in over two years earlier this month, with the stock down 59% since the start of 2022.

The stock has fallen below $57.20 at least 10 times in the last 14 trading sessions before swiftly rebounding, suggesting this level, which at one point also pushed the RSI into oversold territory, is low enough to attract buyers back into the market. Should it come under renewed pressure after the results and this floor fails, we could see AMD slide toward the $51.90 level of support we saw between April and July 2020. From there, we could see it decline toward low of the second half of 2020 at $49.

AMD shares are on course to close up for a sixth consecutive session today, suggesting there is some momentum. The first upside target is the ceiling we saw in late September and early October at $68.40 before it can target the $72 July-low, which is roughly in-line with the 50-day moving average. The other moving averages will then come into play. It is worth noting that trading volumes have been trending lower over the past three weeks to suggest the recent rise could struggle to gain steam without some good news from the results.

The 41 brokers that cover AMD believe there is even greater upside potential with an average target price of $98.50, although we have seen this drop from over $128 three months ago.

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