Advanced Micro Devices Inc. (AMD, Financial) is set to release its second-quarter earnings report on Tuesday. With the stock rising rampantly on Monday, the question beckons whether the company is expected to beat its earnings target.
This analysis is not a forecast of the company's earnings results. Rather, it is an overview of key metrics to look out for.
Operational vantage point
The semiconductor industry has been struck with an array of headwinds this year, with global supply shortages front and center.
A top-to-bottom overview suggests supply-side factors remain an issue. According to JPMorgan's research team, global purchasing managers' index data has slowed to the lowest growth rate in two years.
Source: S&P Global
Although much of the slowdown can be attributed to continuous pandemic lockdowns in China, the signs also indicate the global consumer's spending power is receding. For instance, the U.S. has now recorded two quarters of negative growth, pulling it into a recession by definition.
Due to the slowdown in global consumer strength, AMD might struggle as demand for durable goods wane.
On the positive side, Advanced Micro Devices is a secular growth company with a five-year compound annual growth rate of 32.52%. Thus, it could be one of a few companies to persevere through a cyclical downturn of the economy.
The market share of AMD's CPU segment remains robust as its overall ownership adds up to 27.7%, with the desktop and mobility divisions providing a solid foundation.
Source: WCCFTECH
Furthermore, the company's GPU market share is highly lucrative as the domain is set to grow at a CAGR of 31.1% until 2025 amid an influx of gaming, artificial neural networks and crypto mining activities.
Source: WCCFTECH
Holistically speaking, AMD's substantial market share in the central processing unit and graphics processing unit spaces coalesces to a gross profit margin of 48.5%, meaning the company is capable of exerting its pricing power and dodging temporary economic headwinds.
Key accounting observations
One area to keep an eye on is AMD's Beneish M-Score of -0.5. A Beneish M-Score above -1.78 usually means the company recognized its accrual-based earnings aggressively in recent quarters. Thus, unless the company's earnings proliferate during its second quarter, we might see it revert to more conservative accounting techniques going forward, subsequently producing softer earnings than anticipated.
Another factor to ponder is AMD's more than $3 billion in deferred tax liabilities. Although this can be settled in time, a sudden recognition of taxes could dent the company's earnings per share.
Concluding thoughts
Investors and analysts alike are eagerly awaiting Advanced Micro Devices' second-quarter earnings report. Key metrics indicate the global economy is contracting, which could have hindered the company's operations. Moreover, the Beneish M-Score and deferred taxes line item suggest it is due for a conservative accounting period.
However, we must bear in mind AMD is a phenomenal company that has established itself in a hypergrowth market. Therefore, a second-quarter earnings beat would not be a surprise.
