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AMD Needs a Very Strong Second Half

By Timothy Green – May 6, 2019 at 5:01PM

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With a weak graphics business dragging down revenue to start the year, the chip company’s optimistic guidance requires some big wins.

Advanced Micro Devices (AMD 0.06%) saw its revenue plunge 23% year over year in the first quarter. It expects revenue to drop by 13% year over year in the second quarter. The struggling graphics business, still reeling from the aftermath of the cryptocurrency bubble, is the culprit behind AMD's weak first half of 2019.

Excess graphics card inventory should be less of a problem in the second half. "We believe we made good progress improving channel inventory levels," said AMD CEO Lisa Su during the first-quarter earnings call.

But for AMD to hit its full-year guidance, which the company reiterated after its first-quarter report, its new products are going to need to be big hits. AMD expects to grow revenue by a high single-digit percentage in 2019. Here's what needs to happen for that outlook to come to fruition.

An AMD EPYC chip.

Image source: AMD.

A revenue hole

After a weak first quarter, AMD is about $380 million behind where it was after the first quarter of 2018 in terms of revenue. If the company hits its second-quarter guidance, it will fall behind 2018's pace by another $230 million. That's a total of roughly $610 million.

AMD will enter the second half needing to grow revenue by that amount just to produce flat revenue for the year. Total second-half revenue in 2018 was $3.07 billion. To produce flat revenue for the year, AMD will need to grow its second-half revenue by about 20%. To get to high single-digit growth for the year, that second-half growth will need to be closer to 30%.

Ryzen, Navi, and EPYC

Driving that second-half growth will be a slate of new products set to launch over the next few months. The third generation of Ryzen PC CPUs will launch "mid-year," according to AMD's road map. These chips will be built on a 7nm manufacturing process and will likely bring meaningful improvements in single-threaded performance.

The big question: How aggressive will AMD be with pricing? The company's strategy has been to boost its gross margin by focusing on premium products. AMD will need to balance winning market share by undercutting Intel on price with its desire to keep its margins high.

AMD expects to launch both its Navi consumer graphics cards and its Rome server CPUs in the third quarter. Like the new Ryzen chips, both will be built on a 7nm process.

Navi will be another attempt from AMD to take on rival NVIDIA. AMD has struggled to compete in recent years, although NVIDIA's decision to raise prices dramatically on its latest generation of graphics cards could open a door for AMD. Case in point: NVIDIA's new low-end GTX 1650 loses in terms of performance to a cheaper, two-year-old AMD card. NVIDIA has a huge edge when it comes to power efficiency, but its high prices give AMD the opportunity to launch disruptive products with Navi.

In the server CPU market, AMD has been slowing winning market share with its EPYC chips. The company had a 3.2% unit market share in the fourth quarter of 2018, according to Mercury Research, up from just 0.8% one year prior.

Rome is the second-generation version of EPYC, and it should help AMD continue to grow its share of a very lucrative market. This is a slow-moving market -- Su made that clear in the earnings call, describing AMD's server strategy as "a multiyear, multigenerational road map." AMD's server business has plenty of long-term potential, but it will take quite a while to get there.

For AMD to hit its full-year guidance, both third-gen Ryzen and Navi need to be major successes, while Rome needs to not be derailed by the inventory overhang in the data center market that's hurting Intel's results.

Producing near-30% growth in the second half is certainly possible, given all the new products launching soon. Whether AMD can deliver remains to be seen.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA. The Motley Fool has a disclosure policy.

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