Key Takeaways

  • Analysts estimate adjusted EPS of $0.44 vs. $0.18 in Q1 FY 2020.
  • Gross margin is expected to be flat YOY, but may rise compared to Q4.
  • Revenue is expected to post the biggest gain in nearly four years amid surging demand for chips as millions of people work remotely during the COVID-19 pandemic.

Advanced Micro Devices Inc. (AMD), a global producer of semiconductors and computer processors, experienced soaring demand for its products during the COVID-19 pandemic. That demand has been fueled largely by millions of people working at home on PCs and mobile devices, helping to cause a global chip shortage this year. AMD's growth will be fueled even further by its acquisition of programmable logic device company Xilinx Inc. (XLNX), which should be completed by yearend.

Investors will watch whether AMD can keep up its torrid growth when the company reports earnings on April 27 after market close for Q1 FY 2021. Analysts predict that adjusted EPS will more than double year-over-year (YOY) as revenue rises at the fastest pace in nearly four years.

Investors will also focus on the company's gross margin, a key metric across the semiconductor industry that measures the degree of operational efficiency in a company's business. Analysts estimate that AMD's gross margin will be flat in Q1 FY 2021 compared to the same quarter a year ago. Still, AMD's gross margin in Q1 will be one of the highest in four years.

AMD's share performance reflects both the strength of its sales and investor anxiety about the global chip shortage over the past year. While AMD stock lagged behind the S&P 500 last May and most of June, it began a long advance late in June and outperformed the broader market through early March 2021. In recent weeks, the company's stock has slumped, zig-zagging above and below the S&P. As of April 24, AMD has slightly underperformed the broader market based on 1-year trailing total returns of 48.1% versus 49.4% for the S&P 500.

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

AMD has posted YOY growth in adjusted EPS in 14 of 16 quarters during the last four years save for Q1 and Q2 FY 2019. A large share of those quarters saw adjusted EPS more than double YOY, reflecting AMD's consistently dramatic growth in recent years. Analysts predict that the company will post adjusted EPS of $0.44 for Q1 FY 2021, more than 143% greater than $0.18 a year earlier.

AMD's revenue growth also has been strong. Each quarter over the past four years saw YOY revenue increases, except for Q1 and Q2 FY 2019. In the last quarter of FY 2019, AMD entered a particularly strong streak of revenue increases. The five quarters between Q4 2019 and Q4 2020 saw revenue increases of between 26% and 55%. Analysts estimate even more robust growth in Q1 FY 2021 as revenue climbs by roughly 80%.

AMD Earnings History

AMD Key Stats
  Estimate for Q1 FY 2021 Q1 FY 2020 Q1 FY 2019
Adjusted EPS $0.44 $0.18 $0.06
Revenue (billions) $3.2 $1.8 $1.3
Gross margin 46.0% 46.0% 41.0%

Source: Visible Alpha

The Key Metric

As mentioned above, investors will also look to AMD's gross margin. This key metric measures gross profit, which is sales minus cost of goods sold, as a percentage of total sales. A company can increase its gross margin by either increasing sales or cutting costs, or a combination of both. Computer processor chips are essentially commodity goods, with little quality differentiation between chips manufactured by different companies. This means that producers have little pricing power, so the primary way to boost margins is by keeping costs low, especially during periods of weak sales. At the same time, keeping a lean operation also allows computer processor chip companies to maximize profits when demand is high.

AMD's gross margin has posted strong gains throughout the past for years and especially during the pandemic. The company's gross margin has generally trended upward, moving from percentages in the low-30s in FY 2017 to the mid-40s in FY 2020. Gross margin in Q1 periods has climbed steadily, from 36% in Q1 FY 2018 to 41.0% in Q1 FY 2019 to 46.0% in Q1 FY 2020. In Q1 FY 2021, analysts predict that AMD's gross margin performance will be mixed. It will rise compared to Q4. But it will be flat compared to a year earlier, though remaining at historically high levels. The question is whether AMD can keep gross margin rising significantly.