- AMD Q4 2015 earnings are scheduled for release on 19th January 2016.
- The company is expected to report yet another weak quarter.
- Weak PC sales and lower sales of semi-custom products are both expected to weigh on AMD's results.
- The potential downside for AMD shares might be limited due to the recent selloff by the entire industry.
- 2016 could, however, turn out to be a good year for AMD.
Struggling chip maker AMD (NASDAQ:AMD) will report Q4 2015 earnings on 19th January 2016 after market close. Wall Street consensus is for the company to report non-GAAP EPS of -$0.12. During its third quarter earnings call, AMD said that it expects revenue to decline 10% sequentially ±3%, which points to revenue in the range of $922.2M-$985.8M. AMD pinned the blame for the huge revenue decline on weak semi-custom sales. AMD provides customized silicon chip solutions to various OEMs. For instance, AMD together with Sony jointly developed an eight-core Jaguar CPU for PS4. Microsoft (NASDAQ:MSFT) Xbox One also employs AMD’s custom-designed Jaguar chips. The lower semi-custom sales could be due to the fact that the first quarter is a seasonally slow period for the gaming equipment industry.
AMD has failed to meet consensus earnings estimates for four consecutive quarters.
AMD Earnings Surprise History
There is a fair chance that the company will extend this unfortunate streak when it reports fourth quarter earnings due to a weak PC market.
Weak PC market persists
Gartner and IDC recently released estimates for fourth quarter PC shipments. IDC estimates that PC shipments during the fourth quarter fell 10.6% Y/Y to 71.9M units, slightly better than the third quarter when shipments declined 10.8% Y/Y. Gartner was a little less downbeat and estimated that shipments fell 8.3% Y/Y to 75.7M units. IDC estimates that PC shipments for the entire 2015 fell 10.4% to 276.2M units.
The slightly better fourth quarter shipments suggest that Windows 10 as well as Intel’s (NASDAQ: INTC) Skylake CPU launch have only provided a slight boost to long-suffering PC sales. According to the IDC:
"The PC market continued to face persistent challenges [in 2015] from longer-PC lifecycles and competition from mobile phones and tablets, despite the slowing growth in those markets. However, economic issues like falling commodity prices and weak international currencies, as well as social disruptions in EMEA and Asia/Pacific that disrupted foreign markets were a larger factor for 2015."
There is, however, a ray of hope. IDC expects Windows 10 to provide a significant boost to the PC upgrade cycle in 2016 and lift sales:
"Commercial adoption of Windows 10 is expected to accelerate, and consumer buying should also stabilize by the second half of the year. Most PC users have delayed an upgrade, but can only maintain this for so long before facing security and performance issues."
IDC’s estimates appear to be reasonable enough considering Microsoft recently announced that Windows 10 downloads had reached 200M by the end of 2015, making the new OS Microsoft’s operating system with the fastest adoption rate.
New semi-custom products to boost revenue in 2016
AMD has been lowering its exposure to the highly cyclical PC industry by focusing more on semi-custom products. The company plans to launch a slew of new semi-custom products in 2016 which should give a nice boost to its top line. AMD’s Senior Vice President and Chief Financial Officer Devinder Kumar told Fudzilla in March 2015:
“Those products will launch sometime in 2016. And timing is only dependent on the customers, I won't comment on that. But what I can come from as we said previously, there are two products, it's a billion dollars of revenue starting sometime in 2016. One of the products is ARM. And the last thing I’ll say is we are looking at our semicustom business as going beyond gaming.”
Investors should note that not all AMD semi-custom solutions are gaming products. AMD’s gaming products, however, have continued to do well due to impressive sales of Xbox One and PS4 as I pointed out in this article.
Although AMD might report another weak quarter, I believe the shares do not have too much downside at this point. The shares have been battered this year losing more than 21% after a report by the Semiconductor Industry Association revealed that semiconductor sales during the final months of 2015 had been anemic. The report triggered a massive selloff in the semiconductor chip industry and many stocks in the space have tanked in double-figures year-to-date.
Source: CNN Money
I believe AMD shares remain a good bet for contrarian investors. Investors should wait until the company reports fourth quarter earnings before buying AMD shares.