- AMD is expected to report third quarter earnings on Oct. 15 after market close.
- The company's PC CPU business is expected to continue to show weakness while its discrete GPU business might offer a ray of hope for the company.
- AMD appears to be a good contrarian play based on its recovering graphic cards business.
AMD (NASDAQ:AMD) is expected to report Q3 2015 earnings on Oct. 15 after market close. AMD has failed to meet consensus earnings estimates for the last four quarters running. The company remains a mixed bag this quarter with a 50/50 chance to beat estimates, though the graphic card business might do the trick for AMD when it reports earnings.
Quarterly Earnings Surprise History
PC Microprocessor Weakness Expected To Continue
AMD has two core business segments: PC CPU segment and the GPU and graphics cards business. The PC CPU industry is dominated by Intel (NASDAQ:INTC) which has just reported its third quarter earnings. As was widely expected, Intel’s PC microprocessor segment declined 13% sequentially and 7% Y/Y. Intel acts as a good barometer for the PC CPU industry, and AMD’s PC CPU sales are unlikely to perform any better. Analyst consensus estimate for AMD earnings Q3 2015 points to revenue of $995.8 million, 30% lower than last year’s comparable quarter, and non-GAAP EPS of -$0.12 compared to $0.03 a year ago. On a GAAP basis, AMD is expected to report an even worse loss of $0.17 per share.
AMD’s discrete GPU business, however, could prove to be the company’s saving grace. AMD GPU business has been badly clobbered by NVIDIA (NASDAQ:NVDA), with Nvidia gradually stealing GPU market share from AMD.
Source: Jon Peddie Research and Mercury Research.
AMD’s weak PC business is ironically what has been eating up its promising discrete GPU business. The company’s escalating losses have meant that it has less money to invest in newer GPUs for its graphic cards. As a result, the company’s newer Radeon cards are based on older GPUs with slight performance tweaks. In sharp contrast, Nvidia has been using its red-hot Maxwell architecture in its low-end and mid-range graphics cards including GTX 950 and GTX 960. Nvidia’s newer cards include smart features such as Dynamic Super Resolution which allows enhanced graphic features to be easily incorporated into games.
Nvidia fumbles helping AMD
But Nvidia’s recent fumbles could have helped AMD grab back some market share it had lost to its formidable rival. According to a September report by Barron’s, AMD has been steadily clawing back market share in the $200-$400 range which includes R9 380 and R9 390X cards. This has to do with the widely publicized Asynchronous Compute debacle that involved Nvidia’s graphic cards not supporting Microsoft's (NASDAQ:MSFT) DirectX 12 API called Async Compute. The lack of support by Nvidia’s cards for this crucial feature has forced many Nvidia developers to switch camps to AMD.
But Barron’s also noted that part of the reason why AMD could have regained lost market share can be pinned on the company’s better inventory management. Tom’s Hardware that routinely publishes a comprehensive list of graphic cards that offer the best bang for the buck rated AMD’s low-end and mid-range cards as being superior to Nvidia’s. The general demand for discrete GPUs has also been growing admirably over the past few months so AMD should benefit from the rising tide as well.
But AMD still continues to wobble in the higher end $500+ segment of the market where margins are fatter. The company’s R9 Fury X cards have been in short supply for a couple of months now due to a supply shortage of HBM-based Fiji GPU. This is understandable since many new technologies such as HBM tend to be in short supply during the first few months after their release.
I would rate AMD as a pretty good contrarian play based on the recovery of its graphic card business. Although the company has not been able to truly challenge Nvidia in the high-end segment of the market, it might have a chance to do so once the supply of HBM stabilizes over the next few months. Meanwhile, AMD’s PC CPU business is likely to continue floundering due to general industry weakness and the company’s lack of innovative products to challenge Intel’s dominance. But that too might change when AMD launches its Zen processors to take on Intel’s Skylake processors. AMD therefore remains a mixed bag, but with good potential to come back to life in the not-so-distant future.