Chipmaker Advanced Micro Devices (NYSE:AMD) has had a rough ride this year. AMD shares started the year brightly, but have lost more than 12% since mid-January. However, with the company's earnings due next week, can AMD turn in a strong performance and turn around its fortunes as sales of Microsoft's (NASDAQ:MSFT) and Sony's (NYSE:SNE) video game consoles gain steam? Let's find out.
Analysts expect AMD to earn a profit of $0.01 per share on revenue of $1.34 billion. In the year-ago period, AMD had a loss of $0.13 a share, while revenue was $1.09 billion. So, AMD is set to report good growth in its financials.
The company should be able to hit these targets, since the revenue estimate sits right at the mid-point of its own guidance that it had issued last quarter. AMD's sales are being driven by strong sales of Microsoft and Sony's latest gaming consoles that are leading to demand for large volumes of chips. Going forward, AMD expects its strong performance to continue due to a variety of reasons. Let's take a look.
AMD has done well with its three-step turnaround approach to restructure, accelerate, and transform the business. The company's solid debt management, new product cycle, and efficient R&D look promising, and should help AMD deliver sustainable financial and operational results.
AMD has completed the restructuring of its business, and has created a more proven and proficient business model with significantly lower operating expenses. This is the reason why it is seeing solid growth in revenue and earnings.
AMD's product portfolio now looks very impressive, with extended product lines in semi-custom solutions, ultra-low power solutions, client embedded dense servers, and professional graphics to drive its revenue. AMD has witnessed tremendous progress in semi-custom and client embedded dense servers, which generated more than 20% of its revenue in the fourth quarter. AMD expects these products to generate 50% of the total revenue by the end of 2015.
Strong demand for semi-custom solutions to continue
The company's successful relationship with Sony and Microsoft for gaming consoles has proved to be solid so far, and since demand for these products is continuously increasing, AMD can see an increase in sales of its flawless semi-custom products.
With more than 7 million units sold in less than 2 months, as reported by Sony and Microsoft, the new consoles are off to a solid start. As a result, AMD expects the demand for its semi-custom chips to double in the current year, leading to strong revenue growth.
According to Wedbush Securities, Microsoft is expected to sell 9 million units of the Xbox One this year, while sales of Sony's PS4 would probably come in at 12 million. Moreover, the release of Titanfall by Microsoft has seemingly galvanized sales of the Xbox One. Microsoft had hosted more than 6,000 launch events for Titanfall. This game could be a major driver of Xbox One sales, similar to what Halo was a decade ago. As stated by Reuters -
"Priced $100 more than the $399 PlayStation 4, the Xbox One is seemingly trailing behind in sales. In February, Microsoft announced an Xbox One and "Titanfall" bundle for $499, effectively offering the game for free.
With the launch of "Titanfall" much anticipated, the games industry is watching to see if the title can replicate the "Halo" effect. Released exclusively for the Xbox back in 2001, "Halo" - another sci-fi shooter game - became a blockbuster franchise, fuelling sales of Xbox consoles."
Hence, Microsoft's strategy can help AMD clock solid revenue growth going forward as Xbox sales rise.
AMD is seeing significant improvements in its embedded business that has helped the company achieve substantial revenue growth. AMD recently launched X86 and ARM-based solutions in the first quarter to drive further growth in this category in the current fiscal year.
AMD remains on the track to perform well in its dense server category as well. It recently launched the industry's first 64-bit ARM server SoCs in the first quarter. In addition, AMD plans to launch a new range of ARM-based SoC solutions in the second quarter, as it has observed a strong and growing interest from its traditional server OEMs and end-customers, like cloud providers. AMD counts on these unique offerings to yield positive returns.
AMD is also making strategic investments in its professional graphics business. It is working with key software developers to secure more design wins that will enhance its product offerings in this category. AMD has already hit the ground running through design wins such as Apple's (NASDAQ:AAPL) new Mac Pro desktop.
In addition, AMD has successfully transitioned its traditional GPUs to new R9 and R7 graphic chips, and as a result, it is witnessing strong demand. These graphic chips have led to solid improvements in the GPU segment, and the trend is expected to continue in the future.
AMD's earnings are expected to grow at a terrific CAGR of 35.70% for the next five years. At a forward P/E of just 26, AMD looks like a bargain. The company has built a strong foundation to accelerate growth, and is becoming profitable. So, investors should definitely consider AMD for their portfolio going into the earnings, as the company looks like a solid long-term bet.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.