It's not particularly surprising that Advanced Micro Devices (Nasdaq: AMD) reported blowout earnings, as many recent earnings reports are revealing that tech spending continues to remain strong and that Intel's (Nasdaq: INTC) earnings report showed that it's not benefitting from the increase.
The Q2 earnings was confirmation that AMD has now surpassed Intel as the leading chip company. Its CEO was also quite resolute in saying that it will "fight for every socket" which means it will continue developing new product lines and broaden its offerings. Given these developments, it's also not surprising that the stock is up by more than 20%.
Inside the Numbers
In Q2, AMD reported earnings per share of $0.58 which topped analysts' expectations of $0.47 per share. This was nearly a 360% improvement from last year's Q2.
Revenue also beat expectations at $3.9 billion vs $3.6 billion which nearly double from last year. Another impressive feat was gross margins expanding to 48%, beating analysts' projections of 47%. In total, it was a significant increase from 44% last year and contrary to most semiconductor companies that experienced margin compression.
In its conference call, management said the strong performance was due to the Computing and Graphic segment and the Enterprise, Embedded, and Semi-Custom segment. Of course, a major factor is that AMD chips are used in both Sony and Microsoft's recent consoles as gaming revenue was 168% higher. This should continue to be a positive tailwind for upcoming quarters as the console upgrade cycle remains in its early stages.
The company is also benefiting from the release of its newest generation of chips which has better specs and performance than Intel's. Slowly, corporate managers are starting to favor AMD chips over Intel, and this trend should continue in future quarters given that the company is at least a couple of generations ahead.
The company's chips are also used in Tesla's (Nasdaq: TSLA) infotainment systems for the latest Model S and Model X vehicles, and this is expected to be another growth engine for AMD.
While many companies have not been issuing guidance due to the coronavirus and supply chain challenges, AMD's secular growth is powerful enough to overcome these cyclical headwinds. It raised its 2021 outlook for revenue to grow approximately 60% year over year. For Q3, it expects revenue of roughly $4.0 billion to $4.2 billion, about 46% higher than last year and 6% better than this quarter.
Stock Price Outlook
Long-term, AMD appears to be in great shape. It also is not resting on its laurels as it announced plans for a 5-nanometer chip to be released next year. Of course, Intel is still struggling to launch its 7-nanometer chip.
However, AMD has had quite the run in the short term, so traders or investors shouldn't chase the stock and should wait for a better entry point. For decades, Intel was the way for investors to profit from growth in tech spending, now it's clear that AMD has grabbed the baton. Therefore, the stock should continue to outperform over this cycle.