Key Takeaways

  • AMD reported adjusted EPS of $0.18, matching analysts' expectations.
  • Revenue and gross margin also matched expectations.
  • AMD lowered its full-year forecast, disappointing investors.

What Happened

AMD reported its Q1 financial results on April 28, 2020, and matched analysts' expectations across the board. Revenue, EPS, and gross margin all came in roughly as expected. Despite these reasonably good results in the face of the disruption caused by COVID-19, it also lowered its guidance for the full year, disappointing investors. AMD shares are down nearly 7% in after-market trading, at time of writing.

(Below is Investopedia's original earnings preview, published on 4/20/20.)

What to Look for

Shares of global semiconductor company Advanced Micro Devices Inc. (AMD) have dramatically outperformed the market amid the coronavirus pandemic, rebounding nearly 50% since mid-March and approaching their record high of earlier this year. A key driver is strong sales in recent quarters and new products. Investors will be looking at whether AMD can maintain that growth in the face of the expanding global economic downturn when the company reports earnings on April 28, 2020 for Q1 2020.

The big risk is that demand for processors and other AMD products could falter as the global economy shrinks. As a result, in Q1 investors may focus heavily on a key AMD metric, its gross profit margin, which is a sign of how efficiently the company is managing its operations in good times and bad. For Q1, analysts expect AMD's gross margin, adjusted earnings per share (EPS) and revenue to post robust growth. Glowing results like that could be deceptive because the global pandemic began to affect many markets only late in the first quarter.

AMD investors seem unfazed by the macro headwinds. The stock has posted a total return of 105.9% over the past 12 months compared to the S&P 500's total return of -0.9% as if Friday's close.

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

The company's stock rose slightly immediately following a Q4 2019 earnings report that beat expectations. AMD reported adjusted EPS growth of 296.2% and revenue growth of 49.9% compared to the same quarter a year ago. It marked the second consecutive quarter of rising earnings and revenue after two consecutive quarters in which both the top and bottom lines fell.

After the initial jump following the Q4 report, AMD's stock slid over the next couple of days before beginning a rally that would take it to new highs in mid February. The stock then plummeted with the rest of the market as fears over the spread of COVID-19 were mounting. Investors since then have regained confidence, with analysts forecasting adjusted EPS growth of 223.5% and revenue growth of 40.4% for Q1 2020. One catalyst bolstering the stock is that AMD recently introduced three new AMD EPYC processors that will boost server CPU speed and performance to a whole new level.

AMD Key Metrics
  Estimate for Q1 2020 (FY) Actual for Q1 2019 (FY) Actual for Q1 2018 (FY)
Adjusted Earnings Per Share ($) 0.18 0.06 0.11
Revenue ($B) 1.8 1.3 1.6
Gross Margin (%) 45.8 41.0 36.3

Source: Visible Alpha

Semiconductor chips are demanded more for their intrinsic properties than for the brand strength of the company selling them, not unlike basic commodities. Due to the commodity nature of their products, a key measure of the long-term financial success of semiconductor companies like AMD is gross margin. Gross margin represents total revenue minus cost of goods sold (COGS). Dividing that figure by total revenue results in a measure of gross margin in percentage terms and is a more useful metric when comparing performance with other companies.

AMD in recent years has consistently raised its gross profit margin each quarter compared to the same quarter a year earlier. The company reported gross margin of 44.7% for Q4, marking a sharp rise of nearly 3.6 percentage points from the same three-month period a year earlier. The company said the improvement in gross margin was primarily driven by the ramp up of 7-nanometer products, including its Ryzen and EPYC processors.

Analysts expect an even bigger year-over-year (YOY) boost to gross margin for Q1 2020. The forecast is for gross margin to expand nearly 5 percentage points to 45.8% compared to a year earlier. It's notable that the estimated Q1 margin is nearly 15 percentage points higher than the 31.0% margin AMD posted in Q4 2016, and also would be the highest gross margin reported by AMD since at least 2012.

AMD's business appears little affected by the pandemic so far. The big test will be if the economy moves into a steep and prolonged slump as many economists expect.