Key Takeaways

  • Adjusted EPS was $0.41 vs. the $0.35 analysts expected.
  • Revenue exceeded analyst expectations.
  • Gross margin was in-line with what analysts estimated.
  • Record Q3 revenue driven by strong demand for PC, gaming, and data center products.

What Happened

AMD reported Q3 2020 earnings that beat analysts' expectations. Record third-quarter revenues also came in above what analysts expected. Revenue growth continued to accelerate on strong demand for PC, gaming, and data center products. AMD's gross margin for the quarter was in-line with analysts' forecasts and was up about 1% YOY, driven by EPYC and Ryzen processor sales.

“Our business accelerated in the third quarter as strong demand for our PC, gaming and data center products drove record quarterly revenue,” said AMD president and CEO Dr. Lisa Su.

(Below is Investopedia's original earnings preview, published October 21, 2020.)

What to Look For

Advanced Micro Devices Inc. (AMD), the global maker of computer processors and related technologies, is so far enjoying a year of explosive profit and revenue growth while most corporations suffer from the impact of the COVID-19 pandemic. Some of AMD's success amid the economic turmoil is due to soaring demand for microprocessor chips resulting from the fast-growing work-from-home economy.

Investors will be watching to see if AMD can sustain that strong performance when it reports earnings on October 27, 2020 for Q3 FY 2020. Analysts expect both adjusted earnings per share (EPS) and revenue to rise dramatically year over year (YOY).

Investors also will focus on AMD's gross margin, a key metric in the semiconductor industry that gauges the degree of operational efficiency in a company's business. Analysts expect AMD's gross margin to rise slightly from the year-ago quarter.

AMD's performance is reflected in its stock price, which has dramatically outperformed the broader market over the last year. Shares of AMD have provided a total return of 154.6% over the past 12 months, more than 10 times greater than the S&P 500's total return of 14.5%, as of October 20, 2020.

One Year Total Return for S&P 500 and Advanced Micro Devices
Source: TradingView.

AMD's stock traded sideways in a narrow band from January 1 to mid-July. Then, the stock took off in the two weeks leading up to, and following, AMD's Q2 FY 2020 earnings report on July 28. Adjusted EPS was 12.5% above analysts' estimates, rising 131.5% compared to the same three-month period a year ago. Revenue grew 26.2% YOY.  AMD also raised its guidance for full-year revenue growth.

Both adjusted EPS and revenue grew at an even faster pace in Q1 FY 2020, with adjusted EPS meeting expectations. Adjusted EPS grew 228.4% while revenue rose 40.4% compared to the year-ago quarter. AMD also saw meteoric adjusted EPS and revenue growth in Q4 FY 2019. 

Analysts expect adjusted EPS for Q3 FY 2020 to rise 94.1% YOY, continuing a deceleration trend in year-over-year growth that began in the first quarter of the year. Revenue, on the other hand, will grow an estimated 42.4%, faster than the YOY growth rates posted in each of the first two quarters of the year. For full-year 2020, revenue is expected to rise 32.3%, the fastest pace in at least five years, as adjusted EPS rises 73.0%.

AMD Key Metrics
  Estimate for Q3 2020 (FY) Q3 2019 (FY) Q3 2018 (FY)
Adjusted Earnings Per Share ($) 0.35 0.18 0.13
Revenue ($B) $2.6 $1.8 $1.7
Gross Margin (%) 44.0 43.3 40.1

Source: Visible Alpha

As mentioned, investors will look at AMD's gross margin. This key metric reflects 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.

AMD's gross margin has remained in a stable range of 40-46% over the past two years, from Q3 FY 2018 to Q2 FY 2020. It reflects a significant improvement from the 34-37% range over the four quarters through the middle of 2018. AMD's gross margin was 44.0% in Q2 FY 2020 and analysts are expecting it to be the same in Q3 FY 2020. That strong performance may continue. Gross margin for the full-year 2020 is expected to be 44.8%, the highest level in at least the past five years.