AMD Stock Forecast: 3 Driving Forces of AMD’s Long-Term Bullish Outlook

 

 

This article was written by Kwon Sok Oh, a Financial Analyst at I Know First.

 

 

AMD Stock Forecast


(Source: Wikimedia Commons)

Summary

    • Strong sales of Ryzen APU’s contributed to high earnings in Q1 2018
    • Radeon GPU’s showed strong mining revenue
    • AMD EPYC’s have doubled in sales
    • I Know First’s algorithm is bullish for AMD in the long run

AMD delivers better than expected financial outcomes for Q1 2018

AMD achieved a staggering total revenue of $1.65 billion for Q1 2018, which is a 40% year-over-year increase from Q1 2017. The increase in total revenue was mainly attributable to the 95% year-over-year increase in revenue of the Computing and Graphics segment, made possible through the higher sales of Ryzen APU’s and Radeon GPU’s. The Enterprise Embedded and Semi-Custom segment displayed reduced revenue due to lower semi-custom revenue, but strong sales of EPYC server processors mitigated the decrease in revenue of the segment all together.

 

(Source: Max Pixel)

Gross margin was 36%, a year-over-year increase of 4% driven by the increase in total revenue through the strong sales of Ryzen, Radeon, and EPYC products. Operating income drastically increased to $120 million compared to $11 million during Q1 2017, and net income also showed great improvements to $81 million from the net loss of $33 million of Q1 2017.

Strong sales of Ryzen APU’s contributed to high earnings Q1 2018

Sales of Ryzen APU’s during Q1 2018 accounted for 60% of client processor revenue and was attributed for double-digit percentage growth in client revenue. The most influential event regarding Ryzen APU’s was the delay of Intel’s 10nm chips. On April 26th, during Intel’s earnings call for Q1 2018, Brian Krzanich, CEO, Intel Corp., said “We continue to make progress on our 10-nanometer process. We are shipping in low volume and yields are improving, though the rate of improvement is slower than we anticipated. As a result, volume production is moving from the second half of 2018 into 2019.” On May 16th, responding to the announcement of the delay, Susquehanna analyst Christopher Rolland changed his rating on AMD shares from negative to neutral because Intel’s delay could help AMD in improving its competitiveness for its EPYC and Ryzen products.

(Source: Yahoo Finance)

Building on the strong sales of Ryzen APU’s through Acer, HP, and Lenovo platforms during Q1 2018, AMD has numerous newly introduced systems from OEM partners for its Ryzen APU’s lined up the following quarters including the following:

  • Acer Predator Helios 500 notebook, Predator Orion 5000 desktop and Nitro 50 gaming desktop
  • ASUS VivoBook X505ZA and X570ZD notebooks
  • Dell’s latest Inspiron series including Inspiron 13” 7000 2-in-1, Inspiron 15” 5000 notebooks and Inspiron 7000 gaming desktop
  • HP Envy x360 13” and Envy x360 15” notebooks
  • Huawei MateBook D 14” notebook
  • Lenovo Yoga 530, IdeaPad 530S, 330S and 330 notebooks

(Source: Wikimedia Commons (Dell), Flickr (HP))

AMD is certainly taking advantage of Intel’s setback, giving the company a strong position for a comeback in the CPU/APU market.

Radeon GPU’s showed strong mining revenue

The strong sales of Radeon GPU’s during Q1 2018 was mainly attributable to “both gaming and blockchain demand,” said Devinder Kumar, CFO, AMD Inc., during the Q1 2018 earnings call on April 25th. Kumar also said “blockchain was approximately 10% of AMD revenue in Q1 2018.”

However, several skeptics, including Susquehanna analyst Christopher Rolland, seemed to be uncredulous of the “10%” figure provided by Kumar. Rolland argued that AMD executives are underestimating Radeon GPU purchases for cryptocurrency mining purposes and estimated that 23% of AMD’s revenue is attributable to the sales of Radeon GPU’s for cryptocurrency mining. This raised concerns of revenue drops in the future due to the advent of other cryptocurrency mining technologies, especially ASIC’s for Ethereum. The only ASIC for Ethereum currently available is Bitmain’s Antminer E3, with the first batch being scheduled for delivery around July 16th – July 31st.

(Source: Wolverine Cryptotrading)

So is Antminer E3 currently a threat for AMD? The answer is no: After AMD’s April 25th presentation of its better-than-expected earnings during its Q1 2018 conference call, Ethereum price increased sharply for a month, prompting even the most skeptical analysts, including Rolland, to adjust their outlooks on AMD. On May 16th, Rolland raised his AMD rating from negative to neutral, and it has been on neutral ever since.

Moreover, there are two other major obstacles left for Antminer E3 to beat traditional GPU’s including AMD’s Radeon, and Bitmain has yet shown concrete evidence that Antminer E3 will overcome these obstacles.

The first obstacle is profitability. Initially, the Antminer E3 costed $800, which offered a good price to performance ratio. However, Bitmain recently raised Antminer E3 prices to $2,150, seriously damaging the product’s profitability. Depending on future Ethereum price and difficulty, return on investment for Antminer E3 may occur optimistically after 8 or 9 months or may skeptically never occur.

The second obstacle is the possibility of Ethereum being resistant to ASIC’s. According to the Ethereum white paper, the algorithm for Ethereum introduces numerous contracts into the blockchain in order to hinder certain ASIC’s. Moreover, Ethereum developers announced that they will update the algorithm biannually to prevent ASIC’s from playing their role. It is highly unlikely that Ethereum developers will do nothing while Antminer E3 drives out casual and amateur miners who use GPU’s.

(Source: Pixabay)

Furthermore, even if Antminer E3 manages to perform successfully after the first batch is delivered, AMD still has strong prospects for the upcoming quarters due to its unwavering sales in Ryzen and EPYC products. AMD’s executives reported during the Q1 2018 conference call, “we expect Q2 revenue to benefit from continued strength in our Ryzen and EPYC product families and a seasonal increase in semi-custom revenue, partially offset by a modest decline in graphics due to blockchain.” Mild decreases in GPU sales are not expected to deteriorate AMD’s over strong prospects attributable to Ryzen and EPYC products.

Finally, AMD has one strong fallback plan: the 7nm Vega GPU. On June 6th, AMD presented the industry’s first 7nm GPU at Computex designed for machine learning purposes. AMD delivered a strong punch to Intel as Intel is still struggling to produce its 10nm Cannon Lake CPU’s.

AMD EPYC’s have doubled in sales

“EPYC processor unit shipments nearly doubled from the previous quarter,” said Laura Graves, corporate vice president, investor relations, AMD Inc., during AMD’s Q1 2018 earnings call on April 25th. According to Graves, “Dell EMC launched three of their newest PowerEdge platforms, powering virtualized storage area networks, hybrid cloud applications, dense virtualization and big data analytics with EPYC 7000 series processors.” Moreover, Graves stated, “Recently, supercomputer leader, Cray, announced that it added EPYC processors to its Cray CS500 line of HPC offerings.”

After the conference call confirmed the strong performance of AMD’s EPYC server processor, another major favorable announcement from CISCO pushed AMD’s share prices up drastically. On May 31st, Kaustubh Das, vice president, computing systems product group, CISCO Systems, Inc., announced that CISCO is “introducing the Cisco UCS C125 M5 Rack Server Node, based on the AMD EPYC processor family.” Das added, “we chose AMD EPYC server processors for the first node of the UCS 4200 platform due to the architectural synergy with the workloads our customers want to power with this type for form factor.”

(Source: Wikimedia Commons)

Responding to CISCO’s announcement, Stifel analyst Kevin Cassidy raised his AMD price target to $17 from $14 and raised his adjusted earnings estimate for 2018 to 50 cents per share with a revenue of $6.73 billion from 47 cents per share with a revenue of $6.65. Cassidy believes that the EPYC server processor has proven itself well and that other OEM’s will soon start using EPYC server processors too. Moreover, Cowen & Co. analyst Matthew Ramsay estimated earnings for 2018 to be 51 cents per share with a revenue of $6.96 billion. Ramsay pointed out that Cisco’s utilization of AMD chips in servers that had previously only used Intel Corp. chips has reflected positively on estimated earnings per share.

Currently I Know First’s algorithm is bullish for AMD in the long run

I Know First’s algorithm has very bullish forecasts for the 1-month, 3-month, and 1-year time frames all with predictability ratings of over 0.5. The forecasts are consistent with those of May 16th. The forecasts for longer time horizons have stronger signals and predictability, further supporting the long-term bullish stance of I Know First’s algorithm.

How to interpret this diagram

Past I Know First Success with AMD

On May 16th, I Know First’s Senior Analyst,  Motek Moyen, published a premium article regarding I Know First’s algorithm’s forecast on AMD. I Know First’s algorithm made a bullish 1-month forecast on AMD stocks with a high predictability rating of 0.58. As shown in Yahoo Finance’s AMD chart below, AMD’s stock price has constantly increased until now. I Know First’s algorithm has also made a bullish 3-month and 1-year forecast on AMD stocks, which is still the case as shown in today’s forecast.

(Source: Yahoo Finance)

How to interpret this diagram

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