Earnings Outlook: AMD’s earnings outlook expected to give a clearer picture of where the chip sector is headed

Read: The pandemic PC boom is over, but its legacy will live on

So far, the chip sector has been handing in mixed results. Intel Corp. INTC, -6.94% doubled down on its bullish 2022 outlook even though the current quarter is showing signs of weakness and Wall Street is skeptical. Qualcomm Inc.’s QCOM, -5.74% outlook was also bullish, but analysts could see support in the short term given strength in its handset business.

Texas Instruments Inc. TXN, -3.18% execs played it safe in issuing a cautious outlook because it expects supply-chain problems exacerbated by COVID lockdowns in China to affect the manufacturing operations of its customers. Chip-equipment makers Lam Research Corp. LRCX, -3.87%,  KLA Corp. KLAC, -4.06% and ASML Holding NV ASML, -4.53% all reported that supply-chain problems are hampering sales in a high-demand environment.

For the past several quarters, AMD has turned in beat-and-raise earnings, but last quarter its full-year forecast was a little on the cautious side. That caution appeared to play well with the events that unfolded during the quarter — rising inflation, declining PC sales, a stronger dollar  DXY, -0.40%,  COVID lockdowns in China that are only worsening supply chain problems, and the heightened geopolitical risk from Russia’s invasion of Ukraine.

Read: Why semiconductor stocks are ‘almost uninvestable’ despite record earnings amid a global shortage

With all that staring the sector down, Raymond James analyst Chris Caso recently upgraded AMD to a “Strong Buy” from “outperform” with a price target of $160. In a note, Caso said he expects the chip maker to keep bleeding share from Intel, and that the two will “become a sustained duopoly over time” in the PC market.

“As we have become more concerned about cycle risks given potential for slowing consumer demand and elevated inventory levels at customers, we favor those semi companies with strong secular drivers, more muted cyclical exposure and attractive valuations, for which AMD appears well positioned,” Caso said. “We have strong confidence regarding AMD’s position and share gains in the datacenter market.”

Last quarter, AMD turned in another strong print and rocketed past Wall Street expectations, and in the one before that analysts had trouble nitpicking results. 

What to expect

Earnings: AMD on average is expected to post adjusted earnings of 91 cents a share, up from 52 cents a share reported in the year-ago period, according to a FactSet survey of 34 analysts. Estimize, a software platform that crowdsources estimates from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 95 cents a share.

Consensus estimates, however, are likely to be sloppy, as several Wall Street analysts cautioned that not all analysts have accounted for the contribution of Xilinx Inc., the acquisition of which closed on Feb. 14, in their estimates.

Revenue: AMD, on average, is expected to post record revenue of $5.01 billion, according to FactSet, which would be the first time the company has ever cleared $5 billion in sales for a quarter, representing a 43% surge from the $3.45 billion reported in the year-ago quarter. AMD executives guided for $4.9 billion to $5.1 billion. Estimize expects revenue of $5.17 billion.

This is how Wall Street expects that to break down, according to FactSet data: $2.67 billion from computing and graphics and $2.35 billion from the enterprise, embedded and semi custom group, aka data-center and console sales.

Stock movement: While AMD earnings and sales have both topped Wall Street estimates in the past seven quarterly reports, shares only closed higher the next day in three of those quarters: Last quarter, this past summer and when the stock popped nearly 13% seven quarters ago.

Meanwhile, AMD shares are firmly in bear market territory, 47% lower than their closing high of $161.91 set on Nov. 29, and a meager 2% above their price 12 months ago. By comparison, the PHLX Semiconductor Index SOX, -4.47% is off 8.8%, the S&P 500 index  SPX, -3.63% has slipped 1.9%, and the tech-heavy Nasdaq Composite Index  COMP, -4.17% has fallen 12.4%.

Over the first quarter, AMD shares have dropped 24%, as the SOX index has declined 13%, the S&P 500 declined 5%, and Nasdaq dropped 9%.

What analysts are saying

Bernstein analyst Stacy Rasgon, who has an outperform rating and a $150 price target, said the report is likely to be “somewhat messy” given that some analysts may not be factoring in Xilinx yet.

“AMD’s stock has had a rough go of it lately, a casualty of the broader growth rotation as well as more recent worries over PCs, GPUs etc., but punishment seems somewhat extreme with multiples falling by 60% from the November peak even as forward earnings have increased by over 30%,” Rasgon said.

“To that end, execution has been excellent, their server position appears set to notably strengthen on the back of Intel’s pushout, and they appear quite a bit more positive on Xilinx potential than the Street,” Rasgon said. “We also believe possibly weaker PCs may be less of an issue for them as they have been supply constrained anyway (with other products that could potentially free up if capacity becomes available).”

Read: The end of one-chip wonders — Why Nvidia, Intel and AMD’s valuations have experienced massive upheaval

Cowen analyst Matthew Ramsay, who has an outperform rating and a $150 price target on AMD, expects data-center sales to make up for PC sales.

“Organic AMD estimates for 2022 unchanged as we believe datacenter upside should offset any impacts from PC market demand destruction in Eastern Europe,” Ramsay said. “JuneQ and 2022 guidance will include Xilinx for the first time.”

“We will continue to monitor the PC market for additional signs of further softness, but believe AMD included a pragmatic view in its original guidance,” Ramsay said. “Offsetting the potentially softer PC market, we believe there remains ample upside to AMD’s datacenter numbers driven by deepening cloud engagements and enterprise OEMs into a robust spending environment.”

B of A Securities analyst Vivek Arya, who has a buy rating, speculated that AMD may sidestep the PC decline altogether.

“Note, bulk of PC downside is in low-end Chromebooks where AMD did not participate, nor was it exposed to Apple internal silicon switch,” Arya said in a note. “Main risks: (1) unchanged organic growth could be disappointing to some bulls used to consistent upward revisions; 2) AMD could deflect long-term (pro forma with Xilinx) sales outlook to Jun-9 Analyst Day.” 

Overall, 24 of the 39 analysts covering AMD who are tracked by FactSet rate shares the equivalent of a “buy,” 14 call it a hold and just one calls the stock a “sell.” The average price target as of Friday afternoon was $145.20, representing a 68% premium to the going rate.