Earnings Outlook: AMD earnings: Intel’s data-center surge will be a tough act to follow

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Advanced Micro Devices Inc.’s sales of server chips may get heightened scrutiny following a surprise jump in data-center sales reported by larger rival Intel Corp.

AMD AMD, -2.63%  shifted the power balance against bigger rival Intel Corp. INTC, +8.13%  last year as it released its 7-nm “Rome” chips while Intel failed to bring its 10-nm chip to the market. In chip parlance, nanometers, or nm, refers to the size of the transistors that go on a computer chip, with the general rule being that smaller transistors are faster and more efficient in using power.

AMD’s forceful re-entry into the server business, which had been completely dominated by Intel for many years, was a big part of its turnaround. AMD’s Epyc line of data-center chips fall under the company’s enterprise embedded and semi-custom segment, and analysts expect sales in that segment to rise 39% to $603.8 million when AMD reports fourth-quarter earnings after the bell on Tuesday.

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Expectations may have been changed, however, after Intel topped Wall Street estimates for data-center sales by about $800 million. AMD shares fell 2.6% Friday in the wake of Intel’s report, as Intel stock enjoyed its best day in two years and hit its highest prices since the dot-com bust.

That was a rare drop for AMD — In addition to being the best performing stock on the S&P 500 index SPX, -0.90%  for the second year in a row, AMD shares recently topped their dot-com bubble highs to set new records, and promised an even bigger year in 2020 with the release of several new chips at CES. If it wants to keep that run going, AMD may have to produce a big beat on server sales to match its biggest rival.

What to expect

Earnings: Of the 33 analysts surveyed by FactSet, AMD on average is expected to post adjusted earnings of 31 cents a share, up from the 8 cents a share reported in the year-ago quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 32 cents a share.

Revenue: Wall Street expects revenue of $2.11 billion from AMD, according to 32 analysts polled by FactSet. That’s down from the $2.15 billion forecast at the beginning of the quarter but up from the $1.42 billion reported in the year-ago period. AMD predicted revenue of $2.05 billion to $2.15 billion. Estimize expects revenue of $2.13 billion.

In AMD’s largest segment, computing and graphics chips, analysts expect a 52% rise in sales to $1.5 billion, according to FactSet.

Stock movement: AMD’s stock has surged more than 52% since its last earnings report in late October. In comparison, the S&P 500 index SPX, -0.90% has gained 8.5%, the tech-heavy Nasdaq Composite Index COMP, -0.93%   has grown 12.5%, and the PHLX Semiconductor Index SOX, -1.10% has increased 12% in that time.

What analysts are saying

Cowen analyst Matthew Ramsay, who has an outperform rating and a $60 price target, sees AMD taking away share from Intel for the long term, not just because of launch issues.

“Investors seem to be appreciating the sustainability of this competitive positioning and road map, which we do not see as just a few quarters of opportunistic share gains, and certainly not dependent on incremental competitive missteps from Intel,” Ramsay said.

Read: Intel enjoys big rebound in cloud, but the future is still hazy

Oppenheimer analyst Rick Schafer, who has a perform rating on the stock, sees continued momentum from AMD in the server space with its Epyc 2 chips.

“We estimate 7nm Epyc 2 share ended 2019 around 6-7%, a roughly 2x increase from EOY 2018, and see share hitting 10% midyear as Intel 10nm struggles linger,” Schafer said.

Susquehanna Financial Group analyst Christopher Rolland, who has a neutral rating on AMD, said the chip maker is on the right track when it comes to PCs, even with minor hiccups.

“Despite ceding a small amount of share to Intel on desktops (odd given the launch of new desktop products this quarter), the company managed to increase its share in notebook CPUs (+4.3% QOQ),” Rolland said.

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“Desktop processor [average selling price]s were also up significantly (~20% QOQ) as 7nm Ryzen continue to ramp and carry higher ASPs than predecessors (better mix with more Threadripper/Ryzen 9 also contributed to ASP goodness),” the Susquehanna analyst said.

Of the 38 analysts who cover AMD, 15 have buy or overweight ratings, 20 have hold ratings and three have sell or underweight ratings, with an average price target of $43.14.

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