Graphics chip maker Advanced Micro Devices (NYSE:AMD) is having a great time this year. The stock has already gained more than 20%, driven by increased demand for its chips that are used in Microsoft (NASDAQ:MSFT) and Sony's (NYSE:SNE) gaming consoles. With AMD set to report its second-quarter results on July 17, will the company be able to sustain its momentum? Let's find out.
AMD is expected to report a solid jump in both its top and bottom lines. The company's revenue for the second quarter is expected to jump almost 24% year over year to $1.44 billion, while earnings are expected to come in at $0.03 per share. This will be a massive improvement over a loss per share of $0.09 incurred in the year-ago quarter.
These high expectations from AMD do not come as a surprise. Management is taking various initiatives to fuel its growth. According to CEO Rory Read:
"We are on track to generate approximately 50% of our revenue from high-growth markets, including embedded, semi-custom, dense server, professional graphics and ultra-low-power client, where we can create differentiated winning solutions by the end of 2015."
The good times should continue
During the first quarter, AMD saw solid demand from Microsoft and Sony's game consoles, which have outpaced the previous generation devices. This led to a strong momentum in its semi-custom business. The company credits the success of its products to its unique IP and design expertise. Going forward, management is confident about continued strength in its semi-custom business, which is one of the reasons why AMD should issue a strong outlook when it reports results.
AMD is seeing strong growth in its embedded business due to demand from strategic market makers in key verticals such as digital signage, medical etc. Moreover, this segment has strong margins, and product cycles go up to five years in this space. Thus, embedded solutions are a consistent source of revenue for AMD.
AMD's dense server business is also gaining traction, and its market share continues to increase. Verizon (NYSE:VZ) is one of the well-known clients of the company, which uses AMD's SeaMicro-based dense servers that are powering the world's largest public cloud solution. According to reports, it is anticipated that the dense server market would be around 25% of the overall server market by 2019. Going forward, AMD intends to lead this transition with its unique fabric technology and 64-bit processors.
The chip maker recently launched its first 64-bit ARM server processor, which is in fact the industry's first at 28-nanometer technology. This provides AMD an edge, as it is the only system-on-a-chip (SoC) provider to bridge the x86 and ARM ecosystems for server applications.
PCs and gaming to get better
Clearly, AMD is enjoying tailwinds in several businesses. However, it is facing challenges in the PC business. Although PC sales are stabilizing, it will take some time for the market to pick up momentum. AMD now expects overall PC shipments to decline around 7% to 10% this year as the rate of decline is slowing. Management believes that the company is in a good position:
"...we are positioned to take advantage of this based on our strategy to gain share in parts of the market where we are currently under-represented.
For example, in the commercial client market, we expect to more than double the number of designs that will come to market from our key OEM partners compared to last year. As a result, we believe we will deliver sequential PC revenue growth in the coming quarters of 2014."
All in all, management is pleased with AMD's progress. Going forward, it will continues to focus on key product areas, which is a part of its long-term growth strategy. Its first quarter performance shows that it is making significant progress building the strong foundation required to deliver consistent profitability and revenue growth, and the same should continue going forward. The PC market is stabilizing, while console growth is also improving rapidly.
According to a report:
"Worldwide PS4 sales will reach 37.7 million units by the end of 2016, Wedbush analyst Michael Pachter has forecast. During the same period, Pachter expects Xbox One sales to total 29 million units. The analyst said in a research note sent to investors on Thursday: "We expect Sony's and Microsoft's new consoles to thrive over the next three years, with cumulative worldwide sales of 37.7 million PS4 and 29 million Xbox One consoles by year-end 2016. We do not expect Nintendo's Wii U to fare as well, with cumulative sales of under 20 million by 2016."
Hence, the long-term prospects for AMD also look solid. The console cycle is still in its early stage, and since AMD supplies chips to both Sony and Microsoft, it stands to profit from both consoles.
AMD has done well in the first half of 2014, and considering the prospects in its end-market, it is highly likely that it will be able to continue its solid run going forward. The company looks set to report a solid earnings report, and its outlook should also be impressive. Hence, investors should continue holding AMD going into earnings.
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