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3 Reasons You Should Buy AMD After Its Q4 Results

By Harsh Chauhan - Feb 12, 2018 at 6:31PM

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The graphics specialist is making the right moves to take advantage of favorable end-market dynamics.

Advanced Micro Devices (AMD -6.24%) was heading into the latest earnings season on the wrong foot, but the company has managed to turn things around with a stellar fourth-quarter report. The graphics specialist beat expectations comfortably as both revenue and earnings grew at a terrific pace when compared to the prior-year period.

AMD's top line jumped 34% year over year, boosting its adjusted net income to $88 million as compared to an adjusted net loss of $8 million a year ago. The guidance was the real kicker, though. The chipmaker projects $1.55 billion in revenue at the midpoint of its Q1 guidance, an increase of 32% from the prior-year period and well ahead of the $1.25 billion analyst consensus.

AMD's results and outlook show that the company is capable of clocking consistently high growth rates, and it now seems on its way to a strong comeback after a disappointing 2017. I will go over the key trends in AMD's latest results that tell us why it could be a good bet.

Hand drawing a stock chart return.

Image Source: Getty Images.

1. Computing and graphics are on a roll

AMD's computing and graphics segments supplied almost 57% of its revenue in the recently concluded fiscal year, and it grew close to 54% from the prior year. The segment's outstanding growth was driven by two factors: strong demand for Ryzen central processing units (CPUs) and favorable market conditions for graphics processing units (GPUs).

AMD has been known to be eating into Intel's (INTC -2.20%) CPU market share, and this clearly reflects in its latest results. And AMD isn't done troubling Chipzilla in the CPU space just yet.

The company launched Ryzen Mobile CPUs in Q4 of 2017, and these chips have started gaining momentum of late. Laptop original equipment manufacturers (OEMs) like Acer, Lenovo, Asus, and HP have already unveiled devices based on Ryzen. In fact, Acer and Asus have tapped AMD's Ryzen CPUs and Vega GPUs to announce high-end gaming laptops at affordable prices.

Now, AMD is on track to launch its next generation of Ryzen CPUs in the next couple of months, and it is expected to pack in more power and clock higher efficiency thanks to an improved manufacturing process. Additionally, AMD is expected to beat Intel to the market, as the latter's 9000 series processors are slated to debut in June.

2. A favorable GPU market will be a tailwind

Though GPUs form a part of AMD's computing and graphics business, they deserve a separate mention because of the number of factors at play in this space. AMD is benefiting from a combination of higher GPU pricing and unit shipments, driven by strong demand from the gaming and blockchain markets.

Cryptocurrency mining and blockchain technology are "consuming a lot of GPUs," according to AMD CEO Lisa Su, leading to a shortage of graphics chips that's leading to increased pricing. A DigiTimes report estimates that prices of mid- and high-end GPUs could rise between $5 and $20 in the first quarter of 2018, a trend that could continue for the remainder of the year.

As it turns out, AMD is finding it difficult to meet end-market demand because of the shortage of high-bandwidth memory needed to manufacture the Vega GPUs. However, the company is working with its supplier partners to ramp up output, which should allow it to satisfy the pent-up demand from both gamers and cryptocurrency miners.

So there is a good chance that GPU sales and pricing will remain strong because profitable cryptocurrency mining leads to increased demand for high-end graphics chips.

3. The enterprise business is gaining traction

AMD gets just over 35% of its total revenue from the enterprise, embedded, and semi-custom business. This segment's revenue remained flat year over year in fiscal 2017, but it showed some signs of life in the last-reported quarter.

AMD's enterprise revenue increased 3% year over year during Q4. This might not seem like much at first, but it is likely that this area is going to hit critical mass this year thanks to AMD's EPYC server processors.

AMD claims that it has "closed dozens of new server deals in the quarter, securing key design wins with education, financial services and hosting companies." For instance, Microsoft became the first cloud service provider to launch a service powered by the EPYC server processor, while Hewlett-Packard Enterprise has started shipping server systems based on this platform.

Chinese giant Baidu, meanwhile, is also using EPYC chips in its data centers to enable services related to artificial intelligence (AI) and big data. So AMD's enterprise business can be expected to improve further this year as more server OEMs and cloud service providers launch systems based on EPYC.

In all, strength across both the CPU and GPU markets should allow AMD to turn around its fortunes this year. This makes the stock a good bet considering that it has underperformed the market over the past year, and trades at an attractive 25 times forward earnings as compared to the industry average of 27.4.

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Stocks Mentioned

Advanced Micro Devices, Inc. Stock Quote
Advanced Micro Devices, Inc.
$80.78 (-6.24%) $-5.38
Intel Corporation Stock Quote
Intel Corporation
$37.78 (-2.20%) $0.85
Microsoft Corporation Stock Quote
Microsoft Corporation
$256.48 (-3.17%) $-8.41
Baidu, Inc. Stock Quote
Baidu, Inc.
$153.79 (-0.93%) $-1.45
Lenovo Group Stock Quote
Lenovo Group
$19.66 (-0.35%) $0.07
Hewlett Packard Enterprise Company Stock Quote
Hewlett Packard Enterprise Company
$13.75 (-2.69%) $0.38

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