Advanced Micro Devices Inc. (NGS: AMD). As in 1Q20, the CPU maker posted strong double-digit sales growth, while margin gains led to a more than doubling in non-GAAP EPS in 2Q20. The company guided sharply above consensus for 3Q20 and full-year 2020, in another sign that AMD is claiming CPU market share amid Intel’s missteps.
AMD reported 45% growth in its core business of processors for computing and gaming. Even before COVID-19 triggered shelter-at-home restrictions that have driven growth in home PC and networking gear, AMD has been gaining on close rival Intel with its strongest ever lineup of CPUs.
While Ryzen notebook and desktop processors continue to take share from Intel in the client (PC) space, AMD’s second quarter was notable for accelerating momentum in the server market. AMD’s EPYC line of server processors is on track to gain low double-digit server and data center market share; AMD has historically commanded at best single-digit share in the data center.
Also in the embedded & semi-custom business (EE&SC), demand for semi-custom chips for the new generation of gaming consoles, along with EPYC data center momentum, drove 64% sequential growth in EE&SC in 2Q20.
AMD has had a nearly unprecedented run, rising from a level from which few stocks emerge. As recently as February 2016, AMD traded below $2. Institutional investors frequently can’t own stocks below $5, and the usual way out of that hole is a reverse stock split. But that sends a desperate message, and frequently foretells additional stock weakness to come. AMD ‘toughed it out’ and eventually climbed above $5 on its way to current prices in the mid-$70s. The key event in this transformation was the appointment of Lisa Su as CEO in October 2014. Early in her tenure, she continued the work of turning AMD into a fabless semiconductor company; relationships with merchant fabs such as Taiwan Semiconductor have been instrumental in AMD’s success. The CEO struck partnership deals to give AMD needed cash, while cementing relationships with gaming console companies (Sony, Microsoft) for semi-custom chips. Mainly, she oversaw development of the Ryzen line of CPUs, the continued success of Radeon GPUs, and the origination of the EPYC line of server chips.
We upgraded the AMD shares at $13.74 in February 2018 and have several times considered a downgrade on valuation. In the case of AMD, the company’s success has come at the expense of long-time rival Intel. Although AMD’s revenue for 2019 is about one-tenth that of Intel’s, AMD is going like a house afire. AMD’s revenue has increased from $4.2 billion for 2016, to $6.5 billion for 2018, and is projected (based on July 2020 company guidance) to exceed $8.9 billion for 2020. And this momentum is accelerating, while Intel is still casting about for solutions.
While AMD’s progress partly reflects success in semi-custom chips for gaming consoles and other embedded applications. Most of AMD’s growth has come at Intel’s expense. Given that prior guidance was for 7 nm-based CPUs at the end of 2021, that puts the earliest the chips will be available at mid-year 2022. This is at least a six-month pushback against expectations.
AMD, which like Intel once owned its own foundries, has united its own engineering with the process expertise at Taiwan Semiconductor, the world’s leading merchant fab. As a result of this partnership and relations with other merchant fabs such as Global Foundries, AMD has pulled well ahead of Intel in certain production nodes. At CES 2020 in January, AMD showed off third-generation Ryzen 4000 processors for laptops, based on 7 nm ‘Zen 2’ architecture. And just days before Intel’s 2Q20 results release on 7/21/20, AMD announced Ryzen 4000 series CPUs for consumer and commercial desktop PCs.
The EE&SC annual sales decline reflected weaker semi-custom sales in the last gasp of the current gaming console cycle. Projected 3Q20 sales will serve next-generation devices. That along with EPYC server CPU sales will lead to a record surge in 3Q20 EE&SC revenue.
AMD reports brisk demand from leading cloud companies AWS, Google, and Oracle. In the enterprise space, the EPYC 7Fx2 processor family is being used by Dell Technologies, IBM, Nutanix, Supermicro and others. AMD is guiding for 3Q20 revenue growth of 42% annually and 32% sequentially, as the entire AMD products suite hits its stride. Growth will be mainly driven by EE&SC, where we look for 90% annual growth as both EPYC for servers and semi-custom for the new Sony PlayStation 5 and Microsoft Xbox Series X experience huge demand surges. We also look for at least 20% annual growth in C&C, driven by Ryzen 4000 for notebook and now for desktop. AMD has outperformed peers and the market in the coronavirus downturn, but still appears to represent good value. Current prices in our view do not fully discount AMD’s revenue growth and margin expansion potential, along with ongoing market share gains at Intel’s expense. AMD is growing sales and profits much faster than the market, and the stock appears attractive at current levels.
EARNINGS & GROWTH ANALYSIS
The Street consensus called for revenue of $1.85 billion.
Non-GAAP profit for 2Q20 totaled $0.18 per diluted share, up 117% from $0.08 a year earlier and down a penny sequentially. The Street had projected non-GAAP EPS of $0.16.