Key Takeaways

  • Adjusted EPS was $0.52 vs. the $0.47 that analysts expected.
  • Revenue exceeded analyst expectations amid strong demand for PC, gaming, and data center products due to the pandemic.
  • Gross margin remained flat YOY, as predicted.

What Happened

AMD reported an impressive Q4 FY 2020, with adjusted EPS growing by about 63% YOY and revenue climbing by roughly 53% YOY. Both metrics exceeded analyst expectations, which already were lofty relative to Q4 FY 2019. Gross margin remained flat YOY at about 45%, as predicted by analysts. AMD attributed the strong revenue performance to its Computing and Graphics segment and its Enterprise, Embedded and Semi-Custom segment. The company announced that a surge in net income to more than 10 times its level one year prior was due in part to an income tax benefit of $1.3 billion associated with a valuation allowance release.

(Below is Investopedia's original earnings preview published January 21, 2021.)

What to Look For

Advanced Micro Devices Inc. (AMD), the global producer of semiconductors, computer processors, and similar products, has thrived amid heightened demand for microprocessor chips during the COVID-19 pandemic as more people work from home. The company recently strengthened its dominant position during this period of massive growth with a $35 billion all-stock purchase of rival Xilinx Inc. (XLNX).

Investors will look for signs that AMD can continue that success when it reports earnings on January 26 for Q4 FY 2020. Analysts estimate that both adjusted earnings per share (EPS) and revenue will grow significantly on a year-over-year (YOY) basis, although adjusted EPS may grow at a slower rate than recent quarters.

At the same time, investors will 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 quarterly gross margin will be the second-highest in nearly four years, though it will show only a small improvement from the same quarter a year ago.

AMD's stellar performance over the past year has been reflected in the dramatic gains in its stock price. The company's shares have provided a total return of 73.9% over the last 12 months, nearly 5 times the 16.0% total return of the S&P 500 over the same period, as of January 20, 2021. As of July 2020, AMD's stock has sharply widened its performance gap compared to the broader market.

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

In the past three years, AMD generally has reported robust quarterly growth in adjusted EPS, with only two quarters with declines in the first half of FY 2019. The first three quarters of 2020 provided adjusted EPS growth of more than 228%, 131%, and 125% YOY, respectively. Analysts predict that this pace of growth will slow as AMD reports a still strong adjusted EPS increase of 49.3% YOY.

AMD's quarterly revenue performance in the past three years also has generally been robust, but marked by five quarters with revenue declines or weak growth. During the first three quarters of FY 2020, AMD posted growth of 40.4% in Q1, 26.2% in Q2 and 55.5% in Q3. Analysts estimate a 42.3% YOY increase Q4, which would be slower than the 49.9% increase in the same quarter a year earlier.

AMD Key Metrics
  Estimate for Q4 2020 (FY) Actual for Q4 2019 (FY) Actual for Q4 2018 (FY)
Adjusted Earnings Per Share ($) 0.47 0.32 0.08
Revenue ($B) 3.0 2.1 1.4
Gross Margin (%) 44.7 44.7 41.1

Source: Visible Alpha

As mentioned above, investors will also 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.

The performance of AMD's gross margin metric has been more consistent than its EPS or revenue numbers. The general trend over the past three years has been steady growth, from 36.3% in Q1 FY 2018 to 44.0% in Q3 FY 2020. Analysts expect that AMD's gross margin will be 44.7% in Q4 FY 2020, the second-highest gross margin since early 2017 and topped only by Q1 FY 2020. Nonetheless, the Q4 margin will be only a fraction higher than the same period a year earlier, indicating there may be little room for major gains in this economic cycle.