With shares down 41% so far in 2022, Advanced Micro Devices (AMD 2.20%) investors will be hoping for a turnaround in the stock's fortunes when the company releases its first-quarter results on May 3.
AMD stock jumped nicely in February 2022 after the company reported better-than-expected results for the fourth quarter of 2021. But it failed to sustain that momentum thanks to factors out of its control, such as the Russia-Ukraine war, surging inflation, and interest rate hikes by the Federal Reserve that turned out to be a pain for richly valued tech stocks.
Let's see what could be in store for this semiconductor stock this earnings season.
AMD is expected to report terrific growth, once again
According to the guidance issued by AMD in February, the company expects revenue to increase 45% year over year to $5 billion due to growth across all its businesses. Additionally, AMD expects non-GAAP gross margin to land at 50.5% for the previous quarter, which would be a nice improvement over the prior-year period's figure of 46% and result in solid bottom-line gains.
Analysts, however, are expecting a much stronger performance from AMD. The company's average consensus revenue estimate for the first quarter stands at $5.5 billion, which would translate into a 60% increase over the prior-year period. Its adjusted earnings are expected to land at $0.91 per share, a 75% increase over last year.
So AMD has its task cut out for it going into its first-quarter report, thanks to the market's heightened expectations. Although, the company has topped Wall Street's estimates successfully in recent quarters, beating the earnings estimate handsomely and raising its guidance as well along the way. For instance, the company was originally anticipating its revenue to increase 37% in 2021 as compared to 2020 levels, but it finished the year with 68% top-line growth.
AMD's stronger-than-expected showing was driven by the robust demand for its processors, which are used in a variety of facilities and devices ranging from data centers to computers to gaming consoles. The company's February 2022 outlook indicates that it will continue to enjoy a favorable demand environment. But there may be a twist in the tale for AMD as a result of rival Intel's (INTC 2.31%) resurgence, a potential weakness in demand for graphics cards, and supply chain challenges.
These headwinds pose a challenge to the stock's recovery
AMD's market share gains over Intel have played a critical role in driving the former's impressive growth of late. However, it appears that Chipzilla has started to take market share away from AMD in recent quarters following the launch of new processors.
According to a third-party estimate, AMD's share of the CPU (central processing unit) market dropped to 34.1% in the first quarter of 2022 as compared to 36.9% in the fourth quarter of 2021. AMD was reportedly sitting on 39.4% of the CPU market in the first quarter of 2021, which indicates that it may have lost significant ground to Intel. The loss of CPU market share over the prior year can hurt AMD's growth and keep the company from meeting Wall Street's expectations.
Another headwind for AMD may arrive in the form of subpar console sales. AMD supplies semi-custom chips to Sony and Microsoft for their latest gaming consoles. The significant demand for the PlayStation 5 and the Xbox Series X/S consoles has been a key growth driver for AMD, but that catalyst may weaken in the near term.
That's because Sony recently lowered its sales forecast for the PS5 for the recently concluded fiscal year that ended on March 31. Its prior estimate was 14.8 million units; the new estimate is 11.5 million units. The cut in Sony's forecast may have a negative bearing on AMD's sales and weigh on the chipmaker's ability to clock eye-popping year-over-year growth.
And finally, the falling prices of graphics cards don't paint a good picture of AMD's computing and graphics segment. Word on Wall Street suggests that the demand for graphics cards may be declining because of an oversupply. The sliding prices of cryptocurrencies and sanctions are reportedly affecting graphics card demand and leading to order cancellations, causing a glut of GPUs (graphics processing units) on the market.
An oversupply of graphics cards will affect AMD's sales, as the company controlled 19% of this market at the end of the fourth quarter of 2021. In all, AMD heads into its first-quarter results with multiple headwinds that may create more pressure on the stock price. Weaker-than-expected results or tepid guidance could send the stock packing, but this could also create an opportunity for savvy investors to accumulate shares of AMD given its sunny long-term prospects.