AMD Analysts Discuss Server, Data Center Strength And Conservative Guidance

Shares of Advanced Micro Devices, Inc. AMD are retreating in reaction to the chipmakers' fourth-quarter results.

AMD reported fourth-quarterly earnings of 32 cents per share on Tuesday, which beat the analyst consensus estimate of 31 cents. The company reported quarterly sales of $2.13 billion, which beat the analyst consensus estimate of $2.11 billion.

AMD sees first-quarter sales of about $1.8 billion, plus or minus $50 million, which is below the $1.86 billion estimate.

The Analysts

Summit Insight Group analyst Kinngai Chan upgraded shares of AMD from Hold to Buy

Rosenblatt Securities analyst Hans Mosesmann maintained a Buy rating and $65 price target.

Wedbush analyst Matt Bryson reiterated an Outperform rating and hiked the price target from $51.50 to $75.

Credit Suisse analyst John Pitzer has a Neutral rating and $33 price target.

Wells Fargo analyst Aaron Rakers maintained an Overweight rating and $55 price target.

AMD Has Gained Significant Market Share In PCs At Intel's Expense

AMD's computing and graphics fourth-quarter sales rose 30% quarter-over-quarter, thanks to client CPU market share gains and new GPU product launch, Chan said in a note. Weakness in game console business led to a sequential decline in revenues at its Enterprise, Embedded, and Semi-Custom business but gross margin expanded to 45% on favorable product mix.

Chan believes AMD gained significant market share in PCs in 2019 at its corporate average margin. Helped by sales of 7nm server CPUs, AMD will likely take share from Intel Corporation INTC in 2020, at higher-than-corporate average margin.

The analyst expects gross margin expansion to accelerate through 2020 due to a higher contribution from its Server/data center business.

"While the risk of Intel price aggression remains, we believe AMD's design wins in the server/datacenter has hit a critical mass and should give AMD plenty of gross margin leverage through 2020," Chan wrote in a note.

See also: AMD CEO Lisa Su Joins Cisco Board

AMD Deserves Higher P/E Multiple

AMD's results reflected a clean beat and a bit weaker guidance for the first quarter, Mosesmann said. Strength in EPYC server CPUs were offset by weaker consoles ahead of new platforms and seasonal PC CPUs.

The 2020 sales growth guidance of 28-30% reflects expectations that the company will gain share again, the analyst said. CEO Lisa Su's huge Street credentials and Intel's 2020 guidance that calls for decelerating sales throughout the year render AMD's guidance as reasonable and achievable.

"While we have tweaked our estimates down per management's guide for 2020, we think there is significant upside for 2021/22, which makes this the AMD multi-year share-gain, dollar content gain CPU/GPU compute story that deserves a higher P/E multiple," Mosesmann wrote in the note.

Rosenblatt sees P/E expansion ahead in 2020.

AMD Has Set Very Beatable Bar

Mix of business in the fourth quarter and the implied conservatism in AMD's full-year guidance came in as larger surprises, Bryson said.

AMD has set a very beatable bar. The guidance implied a significant second-half slowdown in Computer and Graphics revenue growth and little like-for-like gross margin appreciation. Given the fourth-quarter strength in the faster growing Computing and Graphics and EPYC server markets, the analyst sees room for upside.

Although trimming its estimates to match AMD's guidance, Wedbush raised its 2021 numbers, assuming more EPYC sales – a result it feels will create a more favorable growth and margin profile for the year.

AMD's Valuation Is More Fair Than Cheap

Management is setting a "low-ish" bar ahead of its March 5 Analyst Day, Pitzer said. He also reiterated his bullish view on the compute total addressable market accelerating.

The analyst attributed his Neutral rating to a valuation that he sees as more fair than cheap. AMD faces risks from macroeconomic uncertainty, including China trade issue and coronavirus scare, and the second-half competitive dynamics as Intel resolves supply shortages.

AMD Needs To Provide Greater Revenue Transparency

Rakers said AMD delivered net-negative results. The analyst thinks AMD needs to provide investors with greater revenue transparency — more quantifiable details on server and data center GPU results.

Moving ahead, Wells Fargo sees the momentum for the second generation EPYC Rome, PC share gains in the wake of alleviation in Intel's CPU shortages, and data center GPU market opportunity as key topics that would be of interest to investors.

The Price Action

AMD's was slipping 8% to $46.46 per share at time of publication.