AMD is about to wander into a minefield

Intel Corp.
INTC,
-0.67%,
Lam Research Corp.
LRCX,
+1.05%,
KLA Corp.
KLAC,
+1.34%,
and Western Digital Corp.
WDC,
-7.32%
all reported forecasts that fell short of Wall Street expectations in some way, with Texas Instruments Inc.
TXN,
+2.09%
being the only company to forecast a better-than-expected outlook. Cowen analyst Matthew Ramsay expects AMD to join TI, with solid results as well as another round of aggressive forecasts.

“Even after raising guidance multiple times through 2021 from 37% to 50% to 60% to now 65%, we believe AMD has the capacity to deliver upside, which would have been higher with better supply,” Ramsay, who has an outperform rating and a $150 price target on AMD, wrote.

Read: Chip sector flirting with bear-market territory as semiconductor earnings kick off

“We expect management to set an aggressive, but achievable outlook for 2022 that demonstrates continued PC and server share gains (including enterprise in both), while still leaving room to raise numbers through the year as supply improves further,” the Cowen analyst wrote.

AMD’s previous quarter was so strong that analysts had trouble nitpicking results three months ago. One milestone to watch is if AMD’s profit margins meet or exceed the 50% threshold, which has become even more significant as Intel executives seek to keep their margins “comfortably above 50%,” or in the 52% to 53% range for the year. AMD reported margins of 48% in the third quarter, up from 44% in the year ago period, but unchanged from 48% in the second quarter.

News on a big deal closing would also be welcomed by investors. With Nvidia Corp.’s
NVDA,
+4.08%
deal to acquire Arm Ltd. reportedly falling apart, that makes AMD’s conditional regulatory approval from Chinese regulators for its $35 billion deal to acquire Xilinx Inc.
XLNX,
+2.61%
even more significant. AMD disclosed late last year that it expects the deal to close this quarter.

Earlier in the year at CES, AMD announced a slew of new products including a $200 graphics card.

What to expect

Earnings: AMD on average is expected to post adjusted earnings of 75 cents a share, up from 52 cents a share reported in the year-ago period, according to a FactSet survey of 32 analysts. Estimize, a software platform that crowdsources estimates from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 80 cents a share.

Revenue: AMD, on average, is expected to post revenue of $4.47 billion, according to FactSet, up from the $3.24 billion reported in the year-ago quarter. AMD had forecast $4.4 billion to $4.6 billion. Estimize expects revenue of $4.61 billion.

Stock movement: While AMD earnings and sales have both topped Wall Street estimates over the past six quarterly reports, shares only gained the next day twice in that time — about six months ago and when the stock popped nearly 13% six quarters ago.

AMD shares are firmly in bear market territory, down 35% off their closing high of $161.91 set on Nov. 29, but have still gained 20% over the past 12 months. In comparison, the SOX index is up nearly 13% in that time, the S&P 500 index
SPX,
+2.43%
has gained 17%, and the tech-heavy Nasdaq Composite Index
COMP,
+3.13%
has been whittled down to a 3.3% gain.

Over the fourth quarter, AMD shares fell 27%, as the SOX index rose 21%, the S&P 500 index rose nearly 11%, and Nasdaq gained 8%.

What analysts are saying

Bernstein analyst Stacy Rasgon, who has a market perform rating and a $130 price target, said AMD’s execution remains strong.

“Share position continues to improve especially in notebook and server,” Rasgon said. “The company’s full-year guidance implies Q4 gross margins reaching within spitting distance of 50%, and Street estimates going forward appear fairly unaggressive (and at levels below long term targets.”

“And the company is now starting to return fairly material amounts of cash,” Rasgon continued. “While PCs will do what they will, we do believe AMD is capitalizing well as Intel enters transition, and seems better positioned than their larger counterpart (and at a minimum our negative Intel call should be increasingly fueled the better AMD does).”

Read: Chips may be sold out for 2022 thanks to shortage, but investors are worried about the end of the party

That PC concern was the cause of Piper Sandler analyst Harsh Kumar downgrading AMD to neutral earlier in the month. The cooling comes after two big back-to-back years for PC sales, which reached shipment levels not seen in a decade because of COVID.

Susquehanna Financial analyst Christopher Rolland, who has a positive rating on AMD, said the chip maker’s “server road map continues to march forward.”

“AMD plans to release 3-D VCache “Milan-X” in 1H22, followed by Zen 4 Genoa by year-end,” Rolland said. “While Genoa could also be experiencing similar DDR5 validation issues as Intel’s {Sapphire Rapids], we have not come across rumors of delay for AMD’s servers.”

Jefferies analyst Mark Lipacis, who has a buy rating and a $145 price target, notes how much AMD is growing their share of the CPU market while Intel’s declines.

“Intel’s share declined by 150bps to 78.9% from 80.4% in Oct-21 as AMD’s share rose by 240bps to 14.5% from 12.1%,” Lipacis said.

Overall, 22 of the 40 analysts covering AMD who are tracked by FactSet rate shares the equivalent of a “buy,” 17 call it a hold and just one calls the stock a “sell.” The average price target as of Friday afternoon was $145.91, representing a 38.6% premium to the going rate.