• 2Q earnings have been very strong overall for the S&P 500. With earnings season almost over, 56% of companies reported a positive surprise and 9% reported a negative surprise
  • Corporate fundamentals remain robust despite some high profile misses like Facebook
  • One company that reported solid results is Advanced Micro Devices (AMD). The company is exposed to several favorable secular trends like artificial intelligence, machine learnings and data centers
  • AMD’s stock price has lagged one of its biggest competitors, Nvidia, but is starting to catch up because it’s shifting to more profitable businesses

Strong 2Q earnings season

It’s easy to forget that the 2Q earning season was really strong because of the media’s focus on several high profile earnings misses like Facebook and Twitter. More than 90% of the S&P 500 have reported results and corporate fundamentals are robust by most measures.

According to Goldman Sachs Portfolio Strategy, 56% of the companies beat consensus EPS. This is the highest figure over the past 7 years and at the top range of the past 20 years. By the same metric, only 9% of companies missed EPS estimates. GS defines a beat as when a company exceeds consensus estimates by more than 1 standard deviation above the mean of the analyst estimates, so that a miniscule beat doesn’t count.

Source: Goldman Sachs Portfolio Strategy

 

Earnings season is an opportunity for investors to digest new financial information and sync up with the expectations of management teams. With so many companies reporting at once, it’s easy to miss good results in all the noise. One stock that exceeded analyst expectations and has a favorable technical backdrop is Advanced Micro Devices (AMD).

Advanced Micro Devices (AMD) – Chipping away at NVDA’s lead

AMD is a $20B semiconductor company that posted 50% revenue growth in 2017 and is expected by Wall Street to post 47% revenue growth in 2018. The strong growth has been driven by an attractive backdrop in the GPU (graphical processing units) and Servers business. The GPU market has expanded rapidly over the past several years because these are the chips that power artificial intelligence and machine learning, as well as crypto mining.  The Servers business is leveraged to cloud computing and data centers which are supported by strong secular growth trends. The company estimates that its end-markets (TAM) have a total size of $75 billion in 2020. To put this in context, AMD’s revenue in 2017 was $5 billion.

AMD has long been overshadowed by its sexier cousin Nvidia (NVDA) which has gone up 1,750% over the past five years because of its exclusive focus on GPUs. However there is scope for AMD to catch up as the company is expanding capacity in high growth segments like GPUs and Servers and shifting away from slower growth legacy businesses like PCs.

Source: Koyfin.  Click here to edit this chart on Koyfin.

 

The bull case is that AMD will pick away at NVDA’s GPU business which generates 70% gross margins. This is no easy task given that NVDA has a multi-year head start on AMD and is able to produce more advanced and faster chips. However, AMD has been able to compete based on price at the middle and bottom of the market and will continue to eat away at NVDA’s lead.

Source: Koyfin.  Click here to edit this chart on Koyfin.

 

Technically, the AMD stock chart is bullish with a strong uptrend after a breakout in June from a 18-months consolidation. The stock gapped up on 2Q earnings and now trading at a 5-year high.

Source: Koyfin.  Click here to edit this chart on Koyfin.

 

Finally, it’s worth noting that significant M&A has occurred in the semiconductor industry with several large acquisition over the past 5 years. AMD is an attractive strategic candidate for other semi companies to gain a foothold in the GPU and server space. AMD’s $20 billion market cap is large for an acquisition but significantly below the recent failed $35 billion acquisition of NXP Semiconductors (NXPI) by Qualcomm (QCOM).