Chipmaker Advanced Micro Devices (AMD, Financial) is flying high after reporting one of its best quarters in more than seven years on Wednesday.
Thanks to sales of Ryzen and EPYC products, revenue grew an astonishing 53% year over year to reach $1.76 billion. Analysts were modeling for revenue of $1.72 billion.
The U.S.-based chip designer reported earnings of 14 cents a share for the second quarter, beating the analyst consensus by one cent. This is the first time it has posted an earnings beat since 2011, when the company reported earnings per share of more than 13 cents.Â
For the third quarter, Advanced Micro Devices is guiding for revenue of $1.7 billion, lower than the analyst consensus of $1.76 billion. The market is euphoric as the stock rose 14% after the closing bell yesterday.
What catalyzed the stellar performance?
Revenue growth was supported by products across the board. The computing and graphics segment – which includes Ryzen processors and Vega GPUs – was up 64%. On the enterprise side, things also look good as the enterprise, embedded and semi-custom (EESC) segment posted 37% year-over-year growth in revenue, supported by growth of EPYC servers.
Ryzen and EPYC deliver
The release of 12-nanometer-based Ryzen products helped the company post revenue growth. Ryzen accounted for 60% of total client revenue for the quarter. The general positive growth trend in conventional personal computers also contributed to the performance. Moreover, EPYC unit shipments were up more than 50% sequentially. Advanced Micro Devices noted there are now more than 50 EPYC platforms available on the market.Â
Unit sales are finally rising
For the last several quarters, the main line of argument against Advanced Micro was that most of its growth is coming from raising average selling prices, not unit sales. Unit sales remained flat in previous quarters, which put question marks around the company’s market share gains. Regardless, the growth in market share seems to be coming from increasing unit sales as the company reported a decline in average selling prices in the second quarter, yet managed to register revenue growth.
“Client processor average selling price (ASP) was lower year-over-year and quarter-over-quarter primarily due to lower desktop processor ASP, partially offset by higher mobile processor ASP,” management noted in a recent filing with the Securities and Exchange Commission.
7-nanometer in sight
It’s also important to note that Advanced Micro Devices is sampling 7-nanometer graphic processing unit products, with a mass scale launch expected later this year. This will allow the company to compete with Nvidia (NVDA, Financial) on a leading node. As performance and power are key traits of a leading node, the company is expected to gain market share on the GPU front – its weak link lately – by the end of 2018.
Moreover, Advanced Micro is planning to launch revamped 7-nanometer server processors in 2019. This will help the company further expand its market share on the server side as Intel (INTC, Financial) continues to struggle with launching its 10-nanometer processors.
Cryptocurrency fears were overdone
Cryptocurrency-related GPU sales trended downward during the quarter, but the weakness was nowhere near what the skeptics were looking for. Revenue was down 3% sequentially in the client computing group amid lower GPU sales in the blockchain market. Despite the sequential decline in CCG, the company posted 7% sequential growth in total revenue, meaning that crypto-fears were overplayed.
In summary, Ryzen is gaining ground on Intel’s offerings in the PC market and EPYC is giving team blue a tough time in servers. Moreover, cryptocurrency fears were overplayed, as evident from Advanced Micro’s second-quarter results.
What’s the outlook?
The long-term bull thesis for Advanced Micro Devices seems intact. First, the industry as a whole can’t afford a monopoly of CPU and GPU suppliers. Advanced Micro Devices is the only viable alternative to big players like Intel and Nvidia. This is a major reason why enterprises and data centers will continue to favor AMD for their IT infrastructure.
Second, Advanced Micro Devices now has competitive products across all segments. On the PC side, Ryzen competes reasonably well against Intel’s eighth-generation Coffee Lake. On the server side, the company is competing on total cost of ownership with its lower priced EPYC and 1-socket strategy. Note that all this success is coming primarily from 14-nanometer technology, which is behind Intel’s 14-nanometer manufacturing technology. The launch of new processors and GPUs on 7-nanometers will further add to Advanced Micro’s market share gains going forward.
What about valuation?
The skeptics agree that while Advanced Micro is turning out to be a success story, its valuation is stretched. On the surface, such an argument is warranted as the stock is trading at a forward price-earnings ratio of more than 30. However, what the bears usually ignore is the fact the chipmaker is trading at a forward price-sales ratio of around 2.5; growth companies usually trade in excess of 5. As a turnaround company, Advanced Micro is set to take market share from the likes of Intel and Nvidia, which puts it in the growth category.
To put valuation in perspective, note that Intel and AMD share a combined market capitalization of approximately $260 billion, with Intel commanding 92% of that combined capitalization. As Advanced Micro now commands more than 10% of the revenue on the PC side, a market cap of more than 10% is also warranted. In short, the valuation isn’t stretched as far as the company's market share position is concerned.
Takeaways
- Ryzen is emerging as a viable competitor against Intel’s offerings, and EPYC is gaining ground on the server front. The situation is expected to further develop in favor of Advanced Micro as the company releases 7-nanometer-based products going forward.
- The launch of 7-nanometer Vega GPU products will also help the company steal market share from Nvidia going forward.
- Valuation seems reasonable as the company commands 8% of the market capitalization of the conventional CPU industry, despite gaining material ground in the client and server CPU market.
- Advanced Micro Devices continues to be an attractive long play given competitive products, a visible product road map and reasonable valuation.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
