AMD’s Q2’16 Earnings Preview: Strong Semi-Custom & GPU Demand To Fuel Growth

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AMD (NYSE:AMD) is set to report its Q2 2016 earnings on July 21st. Despite reporting a 19% and 33% year-over-year decline in its Q1 2016 revenue and non-GAAP earnings per share (EPS), respectively, the company’s stock price has surged by more than 100% in the last three months. We do believe that the company could see a turnaround in revenue growth in the second half of the year, but we feel that the growth drivers do not fully justify the significant increase in stock price. (Read: What Caused The Sudden Surge In AMD’s Stock Price? Why We Believe The Market May Have Over-Reacted) Even though AMD is making considerable progress on its strategy to improve its business by gaining share in the graphics and PC markets, growing its semi-custom business and expanding into the data center market, it continues to incur losses.

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Key Factors That Will Drive Growth In Q2’16 & Beyond

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1. Strong Console Demand & Ramping Of New Deals To Re-accelerate Semi-Custom Demand – In Q1 2016, AMD witnessed an approximate 25% decline (both year over year and quarter over quarter) in its enterprise, embedded and semi-custom business, mostly on account of a seasonal reduction in semi-custom shipments. The company anticipates strong semi-custom growth in Q2 2016. Additionally, new deals signed over the last few quarters will start ramping in the second half of the year, and are expected to earn nearly $1.5 billion over the next three to four years.

2. Growing Momentum In The Computing & Graphics Segment – At $460 million, AMD’s computing and graphics segment in Q1 2016 registered a 14% year-over-year decline,  but just 2% decline quarter over quarter. While the company reported lower client notebook processor sales, it saw improved notebook processor, desktop GPUs and professional graphics sales. Additionally, Q1 2016 was AMD’s second consecutive quarter of double-digit sequential growth in mobile APUs, and the company claimed to have gained share in both the processor and GPU market. The company seems confident that the 2016 product lineup will help it gain additional share in the computing and graphics market. Some of these products include :

  • The 7th generation A-Series mobile APUs, which promises up to 53% higher graphics performance and 51% higher compute performance, compared to competitors. (Read AMD’s Press Release)
  • 14 nm Polaris architecture based Radeon Graphic series will extend AMD’s leadership in DirectX 12, gaming and Virtual Reality. At the 2016 Computex last month, AMD claimed that its first Polaris GPU (Radeon RX 480) will be able to deliver a similar performance as a $500 GPU, but at the low price of $199. [1]
  • The high-performance x86 “Zen” processor core architecture can help AMD scale across multiple markets including high-performance desktops, servers, notebooks and embedded solutions.

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Notes:
  1. Face-Off between Polaris and Pascal GPUs, Market Realist, June 3, 2016 []