- AMD is due to report its Q3 earnings on Thursday, 20 October 2016.
- AMD looks poised to beat estimates and report good quarterly numbers.
- AMD's long term outlook has improved considerably, and Q3 earnings could potentially propel the stock back to $8 a share.
Sunnyvale, California-based AMD (NSDQ:AMD) is due to report its Q3 earnings on 20th October. AMD looks poised to beat estimates and report good quarterly numbers. Short term risks have receded, and AMD's the long term outlook has improved considerably. With short interest spiking pre-earnings, conservative investors might want to avoid the stock. For investors with a risk appetite, AMD comes across as an attractive opportunity, as Q3 earnings could potentially propel the stock back to $8 a share.
Analyst Estimates And AMD Q3 Guidance
For Q3, analysts expect AMD to report a revenue of $1.21 billion, representing just over 14% YoY (Year on Year) growth, and just under 18% sequential growth. This consensus estimate is in line with AMD's own guidance, which projects a sequential growth of 18% at the midpoint, with a guidance range of plus or minus 3%. At the lower end of its guidance, AMD expects to record a revenue of $1.18 billion, with the higher end of the guidance translating to just over $1.24 billion. Analysts expect AMD to report a no profit-no loss Non-GAAP EPS of 0 cents per share, an improvement over 17 cents in losses a year ago, and 5 cents in losses in its previous quarter.
AMD Earnings Track Record And Post Earnings Reactions
AMD has beaten analysts' revenue estimates in each of its last four quarters, while beating or meeting EPS estimates on three out of four occasions. Not a bad track record to have. And since analysts' revenue estimates are in line with AMD's own guidance, it's worth noting that the company has not only beaten its own guidance on the last four occasions, but it has done so with an average beat of 4%.
Over the last four quarters, AMD shares have seen earnings reactions ranging from mildly positive upticks, to massive rallies. After reporting its earnings for Q3 last year, AMD shares ticked up a modest 1% on the next day, while the stock lost nearly 4% on the day following its Q4 earnings release, to eventually recover and gain by a decent ~5% over the following 5 days (and ~9% in a fortnight). AMD's Q1 earnings announcement this year was followed by a massive ~52% single day rally, while the stock accumulated gains of about 34% in the three days following its Q2 earnings release. And based on a host of factors, AMD looks poised to beat estimates again this quarter.
Also Read: Tempted To Short AMD Stock? Think Again
Short Term Risks Recede Going Into Q3 Earnings
In a recent post on AMD, we urged investors not to read too much, too soon, into AMD's recent GPU market share gains. But with things shaping up nicely, AMD looks in a better position to hold on to those gains, at least in part.
Over the last twelve months, AMD has managed to claw back a sizeable chunk of GPU market share (of add-in-boards) from NVIDIA (NSDQ:NVDA), with its share rising from 18% in Q2 last year, to nearly 30% in Q2 this year. While that's great news for AMD investors, historically, AMD's market share has peaked in Q2 every year, before subsequently losing ground to NVIDIA again. Further, some analysts have opined that these gains are more a function of NVIDIA's focus on high end GPUs, which is likely to be a lower volume, but higher margin segment. While that's still plausible, AMD's position in the overall GPU market (not just add-in-boards) is likely to get stronger following its recent deal with Alibaba (NYSE:BABA), which will see the Chinese retail giant use AMD’s GPU’s in its global data centers. Of course, the deal won't impact AMD's Q3 numbers, but it does improve the outlook going forward.
Further, PC sales during Q3 were better than expected according to industry research firm IDC. And it's safe to assume that some of this unexpected demand will act as tailwind for AMD's Q3 numbers. AMD's market share gains versus NVIDIA, pertain to add-in-boards (AIBs), which use discrete graphics cards, and primarily go into desktops and some laptops.
Shares of AMD continue to see a sharp rise in short interest, and with average trading volumes spiking recently, short covering will offer less support for long investors. That's one risk that persists for AMD. Rising short interest basically signals growing skepticism, and a disappointment on any front at this stage could become an excuse for a correction.
The Long Term Outlook Has Improved Significantly
Starting with AMD's move to restructure its long-term debt, there are a host of factors that have lead to a significantly improved long-term outlook. Equity dilution was what investors didn't like about AMD's move to restructure debt, but that correction has come and gone, with the stock recovering to its current levels, after falling from $8 a share to about $5.7 on account of the news. What remains is the long term benefit. While AMD won't reap the benefits of lower interest expenses in the first year following the debt rejig, according to our calculations, it could save about $64 million a year, while helping the company lock in at lower interest rates for longer. If AMD hadn't decided to refinance its debt now, it would probably need to raise debt at higher interest rates, a few years on.
Like we said earlier in the post, AMD's deal with Alibaba is definitely a long term positive, and it gives AMD a foothold in the data centers space, which is currently dominated by Intel (NSDQ:INTC). If reports are to be believed, another big win for AMD's Polaris graphics processors could come from Apple's (NSDQ:AAPL) new (upcoming) line of Mac products, which according to reports "includes tweaked MacBook Air devices with multi-functional USB-C port technology and iMacs with an option for new graphics chips from Advanced Micro Devices,”
AMD expects to turn Free Cash Flow (FCF) positive for FY 2016, which means it has to first offset $178 million worth of free cash flows accumulated for the year and then move into positive territory. So, this will be another number to watch this quarter.
Summing It Up
AMD looks poised to deliver good Q3 earnings numbers. Short term risks are receding and the long term outlook has improved considerably. The stock has a tendency to pile on massive gains following earnings announcements, and it won't be surprising if it climbs back up to $8 a share post Q3 earnings. However, with short interest spiking pre-earnings, even a small disappointment could lead to a near term correction. AMD stock looks like a good investment option for those with a risk appetite. More conservative investors might do well to wait until AMD reports positive free cash flows and maybe some profits on a GAAP basis, before investing in the stock.
Evaluating technology stocks? Check out our recently updated list of top stock picks from the tech sector.