What Happened

AMD reported earnings on Jan 28, 2020 after the market closed. It was a pretty mixed day for AMD. On one hand, they reported slightly higher-than-expected revenue and grew its gross margin by 4 points YOY. On the other, its earnings according to generally accepted accounting principles were a disappointment and it projected a fall in revenue for next quarter.

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

What to Look For

Global semiconductor company Advanced Micro Devices Inc. (AMD) recently released its Radeon RX 5600 XT graphics card, which the company boasts will provide video gamers with higher on-average performance than rivals' cards when playing top PC games. While that could help AMD grab market share from Intel Corp. (INTC) and Nvidia Corp. (NVDA) in the coming year, investors are focusing on the company's quarterly financials when it reports on January 28, 2020 for Q4 2019. Investors will be especially interested in the company's gross margin, which analysts expect to jump along with soaring earnings and revenue. AMD has dramatically outperformed the broader market over the past 12 months with a total return of nearly 158% compared to the S&P 500's more than 26%.

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

While AMD's stock performance has been strong for most of the past year, it accelerated in October, aided largely by a strong Q3 earnings report at the end of that month. The company reported earnings per share (EPS) of $0.11, reflecting 22.2% growth compared to the year-earlier period. Revenue for the quarter rose to $1.8 billion, 9.0% higher than the year-ago quarter.

The third quarter marked a definite improvement from Q2, during which EPS plunged 72.7% while revenue fell 12.8% year-over-year (YOY). AMD's shares tumbled as much as 10% the day following the earnings report. Analysts are expecting YOY EPS to rise about seven-fold on a 50% jump in revenue when the company reports Q4 earnings.

AMD Key Metrics
  Estimate for Q4 2019 (FY) Actual for Q4 2018 (FY) Actual for Q4 2017 (FY)
Earnings Per Share ($) 0.27 0.04 (0.02)
Revenue ($B) 2.1 1.4 1.3
Gross Margin (%) 44.1 41.1 33.7

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 reported gross margin of 43.3% for Q3, a sharp rise of more than 3 percentage points from Q3 2018 and the highest the metric has been in any quarter since 2012. The company said the increase was largely driven by sales of its Ryzen and EPYC processors, both of which have higher gross margins than the corporate average.

The company has consistently boosted its quarterly gross margins YOY since 2017. Analysts are expecting AMD's gross margin to rise even further in Q4 2019 to 44.1%, which is 10 percentage points higher than margins in Q4 2017. These bullish forecasts may be an indication that analysts expect strong demand for the Ryzen and EPYC processors to continue.