Key Takeaways

  • Adjusted EPS was $0.18 vs the $0.16 analysts expected.
  • Gross margin rose in line with expectations.
  • Revenue also matched expectations as AMD grew despite global economic troubles.

What Happened

AMD announced its Q2 2020 earnings on July 28, 2020, and reported slightly higher-than-expected profits. While its revenue and gross margin matched what analysts expected, what makes AMD stand out among other companies reporting this quarter is that its earnings, margin, and sales were significantly higher, not lower, than last year. Another thing we haven't heard much of this year is that AMD is raising its full-year revenue guidance. All of this came on top of the news that its rival, Intel, said it would be delaying the release of its chips with 7-nanometer transistors until 2022 or 2023, a type of product AMD already sells.

(Below is Investopedia's original earnings preview, published July 22, 2020)

What to Look For

Advanced Micro Devices Inc. (AMD) has dramatically outperformed the stock market amid the coronavirus pandemic, rebounding more than 50% since the stock's March lows and approaching its record high earlier this year. A key driver of this performance has been strong sales and new products in recent quarters.

Investors will be looking at whether AMD can maintain that growth in the face of a steep and protracted global economic downturn when the company reports earnings on July 28 for Q2 FY 2020. For the quarter, analysts expect AMD’s adjusted earnings per share (EPS) to double amid strong, but decelerating revenue growth.

Investors also are likely to focus heavily on a key AMD metric, its gross profit margin, which shows how efficiently the company is operating in good times and bad. Analysts expect AMD to report a healthy increase it its gross margin, although the size of that increase will be smaller than in most quarters in the past two years. The big risk is that demand for AMD processors and other products could falter as the global economy shrinks, badly squeezing margins.

AMD's strong growth in earnings, revenue and gross margins may be why the stock has substantially outperformed the broader market over the past 12 months, posting a total return of 74.9% compared to just 8.9% for the S&P 500.

One Year Total Return for S&P 500 and AMD
Source: TradingView.

AMD shares rose sharply in the days following its Q1 FY 2020 earnings report released April 28 that met analysts’ expectations. Adjusted EPS grew 220% on a 40.4% increase in revenue compared to Q1 FY 2019. This marked the third consecutive quarter of rising earnings and revenue following two consecutive quarters in which both the top and bottom lines fell.

After rising during the month following its Q1 earnings release, AMD’s stock drifted downward between May 20 and Jun 26, erasing most of its post-earnings gains. Since then, investors have shown signs of regaining confidence, with the stock rebounding about 15% between June 26 and July 20.

Looking forward to AMD’s Q2 FY 2020 report, analysts estimate adjusted EPS rose 103.9% on a 22.1% gain year-over-year (YOY). These Q2 estimates look strong compared to a year earlier in Q2 FY 2019, when earnings and revenue fell. But they also represent a significant deceleration in growth compared to the most recent quarter, Q1 FY 2020.

Even with this expected deceleration in its key metrics, analysts are optimistic that AMD can prosper amid the fierce headwinds presented by the contracting global economy. They estimate that adjusted EPS will rise 64.9% for all of fiscal 2020, faster than a year earlier, while posting the strongest revenue growth in five years as it increases 25.5%.

AMD Key Metrics
  Estimate for Q2 2020 (FY) Actual for Q2 2019 (FY) Actual for Q2 2018 (FY)
Adjusted Earnings Per Share ($) 0.16 0.08 0.14
Revenue ($B) 1.9 1.5 1.8
Gross Margin (%) 43.8 40.7 37.2

Source: Visible Alpha

Although semiconductor chips are complex, they are so common today in products worldwide that they now are regarded as a commodity, with their value based more on their intrinsic properties than on the brand name of the company selling them. For this reason, semiconductor companies like AMD have to make sure that their operations are run efficiently in order to remain competitive. To measure this, investors often focus on gross margin, which is total revenue minus cost of goods sold (COGS). Dividing that figure by total revenue gives a measure of gross margin in percentage terms, enabling investors to compare the efficiency of one company versus another.

AMD in recent years has consistently raised its gross profit margin in each quarter YOY. The company reported gross margins of 45.9% in Q1 FY 2020, marking an increase of nearly 4.9 percentage points compared to Q1 FY 2019. The company said the improvement in gross margin was primarily driven by the continued rollout of its Ryzen and EPYC product lines, which are part of a new generation of 7-nanometer processors.

Analysts expect a 43.8% gross profit margin in Q2 2020. If true, this would represent the highest margin that the company has achieved during a Q2 reporting period in at least four years, and the third-highest margin it has achieved in any quarter during the past 14 quarters.

AMD's 43.8% gross margin represents a strong increase of 3.1 percentage points from a year earlier, but it nonetheless also represents a smaller gain in efficiency than in every quarter in the past two years. Most importantly, analysts' estimates showing AMD's slowing gross margin growth also reflect their outlook for slowing earnings and revenue growth in the short term. The question is whether this deceleration is simply a one-quarter blip, or the start of a longer trend.