COVID-19 has had ruinous consequences for many companies, but you would be hard-pressed to find any negative impact on perennial winner Advanced Micro Devices (AMD). The chipmaker has swatted away the pandemic and has continued the market trouncing performance it set off on some half a decade ago.
Heading into next week’s earnings (October 27, AMC), in possession of a year-to-date share gain of 78%, RBC analyst Mitch Steves pounds the table for more AMD upside.
The 5-star analyst anticipates a “beat and raise” and, as such, lifts his price target from $84 to $92. This figure implies an additional upside of 13% over the following months.
So, what is behind the target increase?
Steves explained, “Our checks remain positive and we anticipate:
1) upside to gaming numbers due to higher than expected demand.
2) upside on PC CPUs as well given the continued strength from WFH initiatives – we also think AMD is continuing to gain share against Intel and…
3) the steady share gains on the server-side should continue and the firm should reach low-mid teens share (up from 10%) in the next 2-3 quarters.”
Steves also addresses the recent rumored takeover of semiconductor peer Xilinx. Investors’ initial negative reaction to the estimated $30 billion deal was based on the fear the purchase amounts to a “defensive-minded transaction.” Steves believes the noise surrounding the acquisition means “the focus has shifted away from AMD’s current core/organic growth story.” However, the analyst expects such worries will “likely fade” so long as AMD “can produce organic results that meet/exceed expectations.”
In addition to cementing AMD’s status as a large-cap semiconductor company, those in favor of the deal also highlight the acquisition’s potential to help AMD “expand into the communications sub-segment” and point to AMD’s success when going head to head against Intel in the CPU segment.
Here are some things for investors to watch:
1. Server CPU Sales – With the help of strong demand from Internet/cloud giants (the proverbial hyper scalers), AMD’s Epyc server CPU revenue more than doubled annually in Q2, leading the company to declare that it hit its goal of obtaining a double-digit server CPU share. And though some hyperscalers appear to be digesting recent capacity additions right now, AMD forecast Epyc revenue would continue growing during the second half of 2020, aided by new OEM and cloud platform ramps for its second-gen Epyc CPUs (Rome) and initial shipments for its third-gen Epyc CPU line (Milan).
2. PC CPU Sales – Particularly for Notebook CPUs Contributing to the Q2 revenue beat AMD posted in July: Notebook processor sales more than doubled annually, aided by strong consumer notebook demand and a major production ramp for PCs relying on AMD’s Ryzen Mobile 4000 processors, which launched in early 2020.
All signs suggest notebook demand within has not cooled much (if at all) since then. Intel’s PC CPU division reported a 16% Q3 annual increase in notebook-related revenue — and a 25% notebook processor volume increase – as consumer/education purchases remained strong.
3. The Game Console Processor Ramp – Sony and Microsoft’s next-gen game consoles — all of which are powered by AMD processors featuring 8-core CPUs and integrated GPUs – officially launch in November. And (at a time, when gaming-related spending has spiked thanks to COVID-19,) pre-order activity points to the strong initial demand for the hardware.
Not surprisingly, AMD signaled in July that it expects strong sequential growth in Q3 for its “semi-custom” revenue, which is dominated by the console processor shipments. The company also forecast that (in line with seasonality) semi-custom revenue would be down sequentially in Q4, but less than usual.
4. Gaming GPU Demand – Q2 was mixed for AMD’s GPU business: Notebook GPU sales rose annually, but desktop and server GPU sales fell. However, CEO Lisa Su did indicate channel sell-through for desktop GPUs was healthy, and forecast that server GPU demand would improve in the second half of 2020 as cloud design wins ramp and AMD begins shipping the first server GPU based on its new CDNA architecture.
On Wednesday, AMD is hosting an event to unveil the first products for its RX 6000 gaming GPU line, which will rely on a new architecture known as RDNA 2.
5. Potential Chip Supply Constraints – AMD foundry partner Taiwan Semiconductor (TSM) – continues seeing very strong demand from a slew of major end-markets. And that in turn has often spelled stretched lead times for wafer orders involving advanced TSMC manufacturing processes.
AMD Long (Buy)
ENTER AT: 83
T.P_1: 94.09
T.P_2: 104.46
S.L: 79.05
