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Technology Stocks : AMD, ARMH, INTC, NVDA
AMD 100.810.0%12:36 PM EDT

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From: Frank Sully10/25/2021 2:22:50 PM
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AMD Q3 Earnings: Beat And Raise Ahead

Oct. 24, 2021 7:27 PM ET

Advanced Micro Devices, Inc. (AMD)

Summary
  • With Intel disappointing this earnings season and with red flags on Chromebook demand, how will AMD do this earnings season?
  • The article explains the many tailwinds that AMD is witnessing due to its strong product portfolio and how they may shape Q3 and the future.
  • The article also estimates the impact of huge momentum AMD has in HPC and the impact of some less well-known supercomputer wins.
  • This idea was discussed in more depth with members of my private investing community, Beyond The Hype.


JHVEPhoto/iStock Editorial via Getty Images

Intel (NASDAQ: INTC) disappointed investors with its Q3 results and guidance as forecasted. After Intel results, especially the Chromebook meltdown that many investors seem to not have noticed, the investment community may be wondering if Advanced Micro Devices (NASDAQ: AMD) will also disappoint. It is a reasonable concern given the worries about the COVID demand peak and the end of the semiconductor cycle.

On the contrary, AMD management has been telegraphing a strong H2 and 2022 for a while now. As such, during the Q2 earnings call and in subsequent investor events, AMD management has guided that the Company is growing in H2 in all key segments, including data center CPU, client CPU, GPU, and Consoles.

After reviewing Q3 customer and channel developments as well as the upcoming product releases, Beyond The Hype assesses that AMD is operating at a different level than Intel and, unlike its peer, is likely to deliver a solid beat and provide for strong guidance.

AMD's Data Center Business Is Booming

AMD's earnings highlight for Q3, by a wide margin, is likely to be its data center business. Beyond The Hype estimates that the growth in this highly desirable segment in Q3 will be spectacular. Intel results apart, indications are that cloud service provider demand was very strong during the quarter. Intel's weakness with cloud SPs seems to be stemming mainly from AMD taking market share, especially with large core devices where Intel has no good alternatives to offer. Outside of cloud service providers, AMD management has guided for, and reiterated, strong corporate demand in Q3 - strong corporate demand has also been validated by Intel, Micron (NASDAQ: MU), and others during their respective earnings calls.

In addition to cloud SP and corporate servers, there is a powerful High-Performance Computing, or HPC, dynamic at play at AMD that most market observers have not caught on. Unbeknownst to many, AMD is now dominating the HPC design win scene and taking serious market share from Intel and Nvidia (NASDAQ: NVDA). While NVDA's GPU and accelerators continue to do well in AI, AMD is now becoming a major threat in the HPC accelerator business. Preliminary leaks suggest that AMD's MI200 accelerator, which is set to be announced soon, is likely to beat Nvidia alternatives in many HPC applications. Note that MI200 is not vaporware or some futuristic pie-in-the-sky product. Management has already let it be known that AMD has shipped a small volume of MI200 GPU accelerators in Q2. These were likely shipped to the Frontier supercomputer project and other similar HPC applications.

A few next-generation Trento EPYC chips, optimized for HPC applications, are also being shipped with the MI200 GPUs to these same customers. Like MI200, Trento EPYC is unreleased, and not much is known about its performance. But that will not stop the Company from realizing revenues from this product during the quarter. Management commentary to date, as well as Frontier PR so far indicates that the system will be largely built out by the end of 2021. Furthermore, AMD will also be recognizing revenues for silicon and services into 2 more HPC systems in H2 - LUMI and Pawsey. Between these three projects, it seems reasonable to assume that AMD will record about $300M in revenues in Q3, another $300M in Q4, and another couple of hundred million in H1 2022. While these HPC volumes, especially from large supercomputers like Frontier, are lumpy, AMD will deliver strong revenues from this segment in 2021 and 2022. HPC should contribute meaningfully to AMD data center growth in Q3 and beyond.

All these items are pointing to substantial share gains for AMD in the data center CPU and GPUs fronts in Q2. Beyond The Hype estimates that, in Q3, AMD grew data center CPU market share by at least 200 basis points and data center GPU market share by at least 300 basis points. This likely contributed to an incremental $300M to $400M or more data center demand for AMD from Q2 levels.

Ryzen X86 Laptops Continue To Ramp But Chromebooks Are A Headwind

One of the key drivers of AMD's growth during H1 was the company's Ryzen laptop product line. Management has claimed that its new 5000 series products have garnered 150+ designs, which are expected to ramp throughout the year. Management guidance suggests that laptops will continue to ramp in Q3. Checks show companies such as Lenovo ( OTCPK:LNVGY) continuing to introduce new products steadily. On the flip side, Chromebook sales have plummeted in the quarter. Although Intel has much of the Chromebook business, it is reasonable to expect that AMD too would have seen some softness on this front during the quarter. The high-end Ryzen laptop ramp may be offset somewhat by the slowdown in Chromebooks, and it is possible that there may not be significant revenue upside on the laptop revenue front in Q3.

Nevertheless, Beyond The Hype predicts that AMD gained at least 400 basis point market share in the laptop CPU segment in Q3.

GPU Sales Up Strongly In Q3

After several quarters of having severe constraints on GPU supply, AMD was able to ship a decent volume of existing and new GPUs in the quarter. At the end of the quarter, in addition to increasing gaming laptops, channel checks suggested that several of Radeon 6000 series GPUs were available in the retail channel. The 6600 series, catering to low-end gaming, was also launched in the quarter and has been outselling other GPUs at key retailers. Although these were priced well over MSRP, even having stock in the channel is a refreshing change from prior quarters.

It appears likely that AMD shipped $100M to $200M, or more, of additional GPU products in Q3 compared to Q2. The upside here could be substantial - limited only by AMD's supply chain.

Console Business Picking Up

It is well known that AMD supplies gaming console chips to two of the largest console customers - Sony (NYSE: SONY) and Microsoft (NASDAQ: MSFT). The second half of the year is seasonally strong for consoles and indications are that both Sony and Microsoft have seen an uptick in console sales in Q3. Furthermore, AMD is also designed into the upcoming portable Steam Deck console. Strong demand from existing customers as well as ramp-up of the new Steam Deck console suggests that AMD could have about $50M of console upside during Q3 compared to Q2 levels.
Tying It All Up

Based on how the quarter has proceeded, it is exceedingly likely that AMD will ship $300M-$400M incremental EPYC revenues in enterprise and data center, $100M to $200M incremental revenues in GPUs, and about $50M incremental console sales between the new Steam Deck console, and existing PS5 and Xbox consoles. In other words, AMD could potentially ship between $450M to $650M in incremental revenues compared to Q2.

On a $3.85B Q2 baseline, this suggests revenue potential between $4.3B to $4.5B in revenues as opposed to $4.1B in guidance. As such, it is possible that AMD had much more demand, and ship more, especially on the data center CPU and client GPU fronts. The challenge for AMD is not product demand but if AMD has the supply to meet the demand.

A nice revenue beat is only half the story. The other half of the story is gross margins. Keen readers may have noticed that much of the incremental Q3 revenue discussed above comes with juicy margins. AMD's margins on EPYC and MI200 GPU are much higher than the corporate average. Thanks to insatiable crypto demand and elevated GPU prices, GPU margins are also likely to be healthy. Considering the mix involved, Q3 gross margin is likely to be at least 100 basis points above guidance.

Guidance For 2022

And Beyond As strong as Q3 likely was, AMD's strong product offerings for servers, clients, and consoles mean that AMD is likely to continue to grow rapidly - especially in the data center where its products are most advantaged. This will drive strong revenues and strengthen margins for the foreseeable future. Note also that the Xilinx (NASDAQ: XLNX) acquisition is expected to close before the end of the year and all future estimates will have to include Xilinx contributions. And Xilinx's average margins are much higher than AMD's and could push up AMD's combined gross margin by a few hundred basis points. Thanks to organic margin growth and a kicker from Xilinx, AMD should comfortably deliver 50%+ gross margins in 2022. As such, in 2022, it is highly likely that AMD's gross margins will surpass Intel's gross margins. If Xilinx acquisition closes before the end of the month, it is possible that AMD's gross margin could cross Intel's gross margin in Q4 itself.

In summary, AMD is set to deliver a strong beat and raise. AMD is in a period of explosive revenue and gross margin growth, and the Company's valuation should continue to expand meaningfully going forward.


An earlier, more expansive, version of this article was published to Beyond The Hype subscribers on September 13th when AMD stock was trading below $105.

This article was written by EnerTuition

Author of Beyond The Hype, where emerging technology and truth converge.

https://seekingalpha.com/article/4461703-amd-q3-earnings-beat-and-raise-ahead
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