Advanced Micro Devices ’ third-quarter earnings report, set to arrive Tuesday after the closing bell, comes at an interesting moment for the semiconductor industry.
The Wall Street Journal reported that AMD (ticker: AMD) plans to aggressively expand its operations through a potential acquisition of Xilinx (XLNX). AMD hasn’t commented publicly on the reports. Meanwhile, its largest rival Intel, has been struggling to continue to produce the advanced manufacturing technology necessary to make superior semiconductors. Graphics processor maker Nvidia (NVDA) also recently announced the acquisition of Arm, and if the deal closes, it could further transform the industry.
Current conditions leave AMD with a limited window to take advantage of a perceived weakness. With AMD trading at 58 times forward earnings, the question for investors becomes whether AMD can grow into its valuation—the second highest in the PHLX Semiconductor index.
Wall Street generally has a positive view of AMD stock, and has edged up earnings and sales estimates slightly over the past four weeks. Analysts expect adjusted earnings of 35 cents a share on revenue of $2.56 billion, and GAAP earnings of 30 cents a share.
Breaking down AMD’s revenue, analysts expect its computing and graphics segment to deliver sales of $1.55 billion, and its enterprise, embedded, and semi-custom side to report sales of $1.01 billion. The latter segment may have seen a lift in the third quarter, as Sony (SNE) and Microsoft (MSFT) have geared up for their respective November next-generation console launches.
Unless AMD and Xilinx reach an agreement on the reported talks, management will probably say nothing about it, just as Xinlix executives were silent on the matter when the company recently reported earnings. RBC Capital Markets analyst Mitch Steves wrote in a note to clients in October that after the initial reports, long-term investors have begun to warm up to the possibility.
If the Xilinx deal arrives at $30 billion—some analysts have doubts—it would transform the combined businesses into a large cap semiconductor company, plus an expansion into the communications side of chips, Steves wrote.
Beyond the potential Xilinx transaction, Steves’ industry checks suggest that AMD will report positive videogame numbers as more gamers turn toward AMD central processing units, and additional people are working from home because of the Covid-19 pandemic. Steves’ team also predicts that AMD has continued to gain data center market share. In the Oct. 15 note, Steves raised his target price to $92 from $84 and reiterated his Outperform rating on the stock.
Of the analysts that cover AMD, 18 rate the stock a Buy, 20 rate it a Hold, and four have a Sell on the name. The average target price is $81.04, which implies a downside of less than 1% based on Friday’s midday price.
Shares of AMD have advanced 78% this year, as the PHLX index climbed 28%. AMD is set to hold a conference call with investors at 5 p.m. Eastern time, and issue results after the closing bell Oct. 27.
Write to Max A. Cherney at max.cherney@barrons.com
October 25, 2020 at 08:00PM
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AMD Earnings Are Coming. Here’s What to Expect. - Barron's
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