AMD Is Firing On All Cylinders But Its Profitability Depends On Lean Operations

On April 27^th after market close, Advanced Micro Devices AMD posted a strong earnings report giving Intel INTC at least three reasons to worry.

It managed to beat earnings and revenue while meeting gross margin expectations, its key metric. AMD's numerous product launches over the last several months are now paying major dividends for the company that is enjoying high demand, being a poster child for the current chip shortage. However, even after selling over 3.4 billion dollars' worth of chips during the first quarter, it's still not enough.

Q1 Figures

For the first quarter of 2021, AMD reported $3.45 billion in revenue, topping analyst estimates and rising 93% YoYcompared to last year's quarter where revenue amounted to only $1.79 billion and it was the company's best first quarter in a decade.

The stunning jump was made thanks in large part to standout performance by the company's Enterprise, Embedded and Semi-Custom segment that includes server and embedded processor, semi-custom System-on-Chip (SoC), and game console technology development businesses. The big jump in revenue translates to the fact that the segment is well into the black on an operating income basis, which is a major improvement over last year's quarter when it made a loss.

AMD's big run-up in revenue is also reflected in the company's other metrics; along with that revenue AMD's net income has grown by 243% YoY, amounting to $555 million. And if not for an unusual, one-off tax benefit during the previous quarter, this quarter would be AMD's most profitable quarter ever– and it is on a non-GAAP basis.

Along with the EPS that nearly tripled YoY, beating analysts' expectations, AMD's gross margin is holding at 46%, steady versus the previous quarter, the fourth quarter of 2020. If there's a metric that shows clearly just how much things have turned around for a company that nearly went bankrupt five years ago, it's the company's cash balance or more precisely $3.1 billion in cash, cash equivalents and short-term investments with long-term debt down to $313million. From this perspective, AMD is in a stronger financial position than it ever has been.

Well Ahead Of Intel

One week before, Intel reported a slowdown in revenue from its data center group. AMD revealed its data center revenue doubled with six straight quarters of record mobile processor revenue that was generated due to an increasing number of customers. Compared to Intel, AMD is more competitive by being more innovative, it performs better, it has a better price point and although its most important business is the data center, its portfolio even gains in diversification with the acquisition of Xilinx.

Outlook

AMD's expectations for both the quarter and for the rest of the year are just as resilient as during previous quarters.For FY 2021, AMD guided revenue growth of 50% YoY whereas Intel expects a revenue decline of 1% YoY.

Demand for its.chips still outpaces supply in most segments, so AMD has yet to fully tap the current market and find ways to meet demand.  As its computer processor chip products are commodity goods, the differentiation in quality between competing manufacturers is minimal, which means that the company's profitability depends on maintaining its operations as lean as possible. To enhance its profitability when demand is high, AMD can boost its gross margin either by increasing sales, cutting costs, or both.

High Demand Alone Is Not Enough

With CPU, GPU, and semi-custom, AMD's numerous product launches are now paying major dividends. But since AMD is a fabless chipmaker that uses semiconductors made by Taiwan Semiconductor Manufacturing TSM for assemble its chips, the current semiconductor shortage and supply issues could pose problems. To reassure investors, management stated that the company has "good visibility" on potential supply concerns and it increased its forecast through the end of 2021.

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