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Will AMD's Q2 Earnings Benefit from GPU Product Adoption?

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Advanced Micro Devices (AMD - Free Report) is set to report second-quarter 2019 results on Jul 30.

The company’s second-quarter results are likely to benefit from robust demand of graphic processor units (GPUs), which are now widely utilized in industries like gaming, automotive and blockchain.

Notably, lower GPU and client processor sales more than offset accelerated sales of Ryzen desktop and mobile processors in the last reported quarter. The trend is likely to hurt AMD’s computing and Graphics (CG) segment revenues in the to-be-reported quarter. Notably, the segmental revenues decreased 25.5% year over year and came in at $831 million in the last reported quarter.

Click here to know how the company’s overall Q2 performance is expected to be.

Advanced Micro Devices, Inc. Price and EPS Surprise

 

Advanced Micro Devices, Inc. Price and EPS Surprise

Advanced Micro Devices, Inc. price-eps-surprise | Advanced Micro Devices, Inc. Quote

Highlights of CG & ESC Segment

AMD is well poised to grow overall GPU revenues in the second quarter due to strong adoption of new products.Moreover, AMD expects to introduce its first 7-nanometer Navi gaming GPUs in the third quarter. Notably, AMD is on track to begin Rome production shipments in the second quarter to support a third-quarter launch.

In the quarter under review, AMD introduced rolled out Radeon RX 5700 series graphics cards based on latest RDMA gaming (or Navi) architecture. With these cards, AMD is foraying into the high-end graphics card market. Consequently, AMD’s revenues are poised to benefit significantly if the latest GPU can cater to the rising demand of users.

We believe AMD’s portfolio strength will help in expanding customer base and bolster the company’s top line in the third quarter.

Non-GAAP gross margin in the third quarter is anticipated to be 41%, driven by higher sales from Ryzen, EPYC and datacenter GPU processor sales.

However, management expects weakness in graphics channel, which is likely to face seasonality in the second quarter. Moreover, management anticipates lower graphics sales in the forthcoming quarter owing to absence of blockchain related GPU revenue and lower memory sales. This is likely to impact to-be-reported quarter’s results.

The Zacks Consensus Estimate for computing and graphics segment for the second quarter is pegged at $945 million down from $1.086 billion reported in the year-ago quarter.

Coming to Enterprise, Embedded and Semi-Custom segment, revenues are projected to decline in the second quarter, primarily owing to lower semi-custom product, partially offset by higher EPYC datacenter processor sales.

During the quarter under review, Amazon’s (AMZN - Free Report) cloud arm, Amazon Web Services (AWS), announced broader availability of the AMD EPYC processor-based service. AWS launched three new EPYC processor-powered EC2 instance families, including the first T3-series instances.

Moreover, Sony’s upcoming gaming console will be powered by a custom AMD chip based on the “Zen 2” CPU and “Navi” GPU architectures. Strong adoption of EPYC server processors is a key catalyst. The momentum is expected to continue in the to-be-reported quarter.

To mention, Enterprise, Embedded and Semi-Custom segment (ESC) revenues declined 17.1% year over year in the last reported quarter.The Zacks Consensus Estimate for Enterprise, Embedded and Semi-Custom segment for the second quarter is pegged at $577 million down from $670 million reported in the year-ago quarter.

Zacks Rank & Key Picks

AMD currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Mitek Systems, Inc. (MITK - Free Report) , and Lattice Semiconductor Corporation (LSCC - Free Report) , both flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Mitek Systems and Lattice Semiconductor have a long-term earnings growth rate of 15% and 12.5%, respectively.

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