AMD Expected To Draw Strength From Intel's Weaknesses, Gaming Console Chips

Advanced Micro Devices, Inc. AMD is on tap to release its third-quarter earnings report Tuesday after the market closes. The report assumes significance, as rival chipmaker Intel Corporation INTC turned in a disappointing quarterly performance.

Q1 Expectations: Santa Clara, California-based AMD is expected to report earnings per share of 35 cents. The chipmaker's revenues are estimated to come in at $2.56 billion.

A year ago, the company reported EPS of 35 cents on revenues of $1.8 billion.

A Modest Beat? AMD is primed for a modest third-quarter beat, aided in part by more favorable data center demand mix, BofA analyst Vivek Arya said. As opposed to Intel,the enterprise segment, which softened, accounts for merely 20% of AMD server sales.

Intel's modest 1% year-over-year growth in PC chips despite IDC's forecast for PC unit shipments increasing 15% in the third quarter is a pointer to AMD's share gains at the expense of Intel, Arya noted.

"Indeed, our Steam survey tracker has shown AMD's share in CPUs for PC gaming growing steadily over the last several months to recent 26% peak," Arya wrote in the note.

PC mix toward consumer from enterprise is also favorable for AMD. Additionally, BofA expects semi-custom demand to be robust following very successful launches of both the PlayStation 5 and Xbox X game consoles. The firm estimates over $650 million in revenues from the segment, premised on unit sales of 6.5 million at $100-$110 ASP.

The biggest constraint to upside, according to BofA, will likely be more due to capacity constraints at Taiwan Semiconductor Mfg. Co. Ltd. TSM rather than a demand issue.

Related Link: AMD's Interest In Xilinx 'Strategic': Here's Why

Q4 Guidance: The 2%-3% sequential growth implied by the fourth-quarter consensus estimate is achievable, given new product ramp in desktops and servers, BofA said. The consensus estimates for the fourth quarter call for EPS of 39 cents and revenues of $2.62 billion.

The launch of Intel's new 10SF Tiger Lake notebook processors will spice up competition in the notebook segment, Arya said.

AMD's PC mix/ASPs will likely hold up better partly due to gaming mix and limited participation in Chromebooks. Arya also sees semi-custom business facing tougher comps in the fourth quarter.

With mix shifting away from semi-custom, overall gross margins are expected to expand 200 basis points to 46% in the fourth quarter, BofA said.

Key Areas: Clarity on AMD's M&A strategy, especially any word on the speculated Xilinx, Inc. XLNX deal, and subdued gross margins, given the higher mix of consoles, are among things investors will be keen to know, BofA said.

AMD's Stock: AMD's shares are up about 80% year-to-date, and in the third quarter, the stock rose about 56%. The stock closed Monday at $82.23. 

BofA has a Buy rating and $100 price target for AMD.

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