AMD Stock Gets a Price Target Boost Ahead of Earnings

support@smarteranalyst.com (Ben Mahaney)
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Advanced Micro Devices (AMD) stock climbed nearly 2% on Wednesday due in part because of some favorable analyst commentary from Cowen tied to this quarter’s earnings results. Cowen analyst Matthew Ramsey made a number of remarks within its report that emphasized the competitive foothold that AMD will begin to leverage tied to its 7nm roadmap for server CPUs, which should drive meaningful revenue/earnings upside in the next couple quarters.

Ramsey doesn’t anticipate GPU revenue to be strong in the 1st half of 2019 but will improve due to seasonal strength in the second half of 2019. Ramsay also anticipates server revenue ramp to bridge financial results until we get to an inflection in the current GPU cycle, which experienced a pullback in demand from both consumers and crypto miners in Q1’19 and Q4’18 and will have lingering effects into Q2’19 results.

Keep in mind, AMD has been able to go on a run since its prior quarter earnings announcement due to growth in notebook, desktop and server CPU revenue. For Q1’19 and Q2’19 analyst consensus anticipates revenue of $1.26B and $1.52B, which represents a decline in revenue of -23.7% and -13.2% in the next two quarters due primarily because of GPU revenue.

However, Ramsey raised his price target to $33 on AMD stock due to 7nm ramp-up as opposed to any adjustments to his financial estimates. Also, upside to valuation seems baked into the stock as it’s currently trading at $27 to $30 (based on the 1-month trading range).

Ramsay states in his report that Q2’19 results could surprise to the upside:

"Looking to 2Q19, our $1.65B estimate is above-consensus (and admittedly perhaps aggressive), up 32% Q/Q but down 6% Y/Y. Drivers of the Q/Q growth include: a return to growth in gaming GPUs off the artificially low-base with sell-in of Navi; continued DC-GPU ramps partially aided by the Google Stadia win; seasonal growth in both DT and NB; and a sharp seasonal step-up in console sales. Looking ahead, however, we expect a sharper ramp in 2H19 driven by normalized gaming GPU channel (off low comps), PC-CPU growth catalyzed by 7nm Ryzen-3 launches into the seasonally strong portion of the year, and server-CPU growth as 7nm Rome products launch while cloud datacenter spending picks up."

The gaming GPU channel should clear-up in the 2nd Half of 2019, which should in turn give AMD an opportunity to sell-in some GPUs tied to Navi GPU slate expansion, and datacenter GPUs in Q2’19 where Q1’19 comps are abnormally weak. I believe the expectations embedded into Ramsey estimates, which are more optimistic than consensus estimates seem reasonable, as AMD will have an opportunity to outshine Intel given the modest performance bump for Xeon 2nd generation, which was demonstrated at Intel’s datacenter day in the 4th week of March. AMD’s launch of Rome Server CPUs in 2H’19 and Ryzen 3 CPUs on 7nm nodes versus current generation Ryzen 2 at 12nm nodes is a near-term catalyst that investors shouldn’t miss.

Matthew Ramsay also notes that AMD should sustain a manufacturing advantage of 6-months for PCs and 1-year for servers versus Intel:

"We see powerful growth drivers as AMD launches 7nm Ryzen-3 PC CPUs, 7nm Navi gaming GPUs and 7nm Rome server CPUs all during the summer, as our checks indicate both CPU products have been well received by the company’s partners under NDA. We would remind investors that these launches will mark the beginning of period where AMD will have a manufacturing advantage versus Intel using 7nm from TSMC while Intel remains on 14nm for most products, a lead we expect to last ~6 months in PCs and ~1 year or more in servers as the roadmaps currently stand."

AMD has been able to exhibit more of a manufacturing advantage but didn’t increase transistor density in the 12nm Ryzen 2 (which was released in 2018) versus the initial 14nm Ryzen series (launched in 2017) but will increase density of transistors in the Ryzen 3 (anticipated launch in 2019). Hence the performance jump will be more significant than in the mid-cycle refresh where AMD released some additional features tied to power band performance, and higher wattage in the 12nm Ryzen 2 translating to around 10% performance boost between Ryzen 1 and Ryzen 2.

The next Ryzen series, or Ryzen 3 will launch in the summer of this year, which follows more of an annual CPU upgrade cadence, which has been the primary reason AMD has rallied for the past couple-years. The consistent release of enhanced CPUs every year demonstrates that AMD’s roadmap is on track namely due to its production partnership with TSMC, and because their engineers are working hard to keep a competitive line-up going. Sustained execution over a longer window will give AMD added market share, which is exactly why investors continue to buy the stock, and it marks a big departure point from the days AMD was consistently behind Intel in both CPU design and manufacturing technologies (AM2+ generation).

Because AMD has managed to leapfrog the production timeline of Intel by around a year, AMD’s parts should be very competitive especially in the high-performance and server segment over the next two-years. AMD could increase core counts or could announce a number of new surprises at Computex, which is where analysts and insiders anticipate the launch of Ryzen 3 and AMD’s mid-end Navi GPUs, which will fuel more speculation tied to full-year financial results. Near-term, the earnings announcement should prove to be a positive catalyst due to AMD’s financial outlook on the call, and a beat on consensus estimates seems doable as expectations already embed a steep drop in financial comparisons before earnings results ramp-upwards into the second half of 2019.

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