Chipmaker Advanced Micro Devices (AMD, Financial) and social media giant Facebook (FB, Financial) are set to report quarterly results tomorrow. Both companies are in a good position to beat the Street.
Advanced Micro Devices will most certainly benefit from the new Ryzen and its continuing server success with EPYC, while Facebook will ride the success of Instagram. Both tech names are looking good going into earnings.
Advanced Micro Devices
The designer of Ryzen and EPYC processing chips is scheduled to reports the results of its second quarter after the market closes on Wednesday. Analysts are expecting the company to report $1.72 billion in revenue, translating to earnings per share of 13 cents. This leads to an annualized price-sales ratio of 2.29. As the company is set to gain personal computer and server market share amid its upcoming 7-nanometer Ryzen and EPYC processors, a sub-three price-sales ratio seems reasonable.
Zen+, EPYC and more
Regarding the current quarterlty results, Advanced Micro Devices should beat earnings estimates. Growth in the conventional PC market, increasing server sales and Ryzen+ have been some of the growth catalysts for the company during the quarter.
The conventional PC market posted growth for the first time in six years during the second quarter, which will certainly benefit Intel (INTC, Financial) and Advanced Micro Devices.
The chip-making underdog will also benefit from increasing server sales during the quarter. EPYC was added to Cisco’s (CSCO) UCS server line of systems during the quarter. Hewlett-Packard (HPQ) also included ProLiant DL325 Gen10 one socket server to its lineup of servers during the quarter. The release of 12-nanometer Zen+ also bodes well for Advanced Micro Device’s current quarterly results. The new Zen boasted 15% performance gains, bringing it head-to-head with Intel’s Coffee Lake.
Cryptocurrency-related sales are going to be a wild card for the company, though. While Advanced Micro Devices claims that only mid-single-digit share of its revenue came from cryptocurrencies during 2017, some reports claim that 10% of the company's revenue was generated from crypto-related sales in 2017. As crypto-related graphics card sales have been weak during the first half of 2018, it might hurt the company's top line for the quarter.
Only the time will tell if Ryzen and EPYC manage to offset the crypto weakness during the quarter. However, it seems that upgraded Ryzen, EPYC-based revenue and a higher penetration in notebooks during the quarter is set to help Advanced Micro Devices beat estimates tomorrow.
The social media giant is set to report the results of its second quarter after market close on Wednesday. For the quarter, the Street is looking for earnings of $1.72 per share on revenue of $13.4 billion. The highest revenue estimate stands at $14.1 billion; revenue isn’t expected to fall below $12.8 billion, according to Wall Street. This leads to an annualized price-sales ratio of an astonishing 11. Given that earnings are expected to grow at 23% per annum over the next five years, investors are ignoring the high price-sales ratio as far as the stock price is concerned.
Facebook is also likely to beat analysts’ top line and bottom line consensus amid rising advertising revenue and better-than-expected performance of Instagram. There’s a positive industry-wide growth sentiment as Alphabet (GOOGL, Financial) reported 25.6% year-over-year growth for its second quarter. The search engine company also managed to beat both top line and bottom line estimates on Monday.
Facebook is set to ride the industry-wide trend to beat estimates when it reports second-quarter results.
Instagram continues to shine
Moreover, Instagram is doing better than expected, which also increases Facebook’s chances of beating the Street tomorrow. According to a digital marketing report, ad spend increased 40% on a year-over-year basis. More interestingly, Instagram ad spend increased 177% on a year-over-year basis. As Instagram makes up more than 10% of Facebook’s revenue, the social media company is set to report more than 50% growth in revenue tomorrow if data of digital marketing report holds; analysts are expecting a 43% increase in revenue. In effect, Facebook is set to beat top line estimates.
Takeaways
Going into earnings, Facebook is a strong candidate to post revenue and earnings beats, fueled by Instagram’s performance. The stock is expected to show post-earnings gains consequently.
As for Advanced Micro Devices, things are a bit different. Although the company is likely to beat revenue and earnings, the market will react negatively (as evident from historical post-earnings volatility) even if there’s slight weakness in guidance. As crypto-weakness is looming, a slightly weak guidance can send the stock tumbling. In short, the post-market reaction might not be favorable for Advanced Micro Devices even if it does beat revenue and earnings tomorrow. Nonetheless, the long-term buy thesis seems to be intact for the Santa Clara, California-based chipmaker.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
