Now that we are in the final month of the year, it's time to start looking forward to 2020. Today, I'm taking a look at chipmaker Advanced Micro Devices (NASDAQ:AMD), which, as the chart below shows, has been one of the market's best performing stocks this year. Shares have more than doubled as investors are looking forward to an impressive revenue growth run about to occur, but with expectations starting to rise a bit, the company must deliver.
(Source: Yahoo Finance)
With an ongoing US/China trade war and cryptocurrency bubble bursting, AMD saw an impressive revenue growth cycle come to a close in the back half of 2018. The Q3 period saw the top line just barely increase, while the final period of the year saw the start of a three quarter revenue decline. Things returned to the green in Q3 of this year, when the top line rose by nearly 9%, but that was only about half of what the street was originally looking for.
It was at the Q2 report this year where management took down its revenue growth forecast for the year, and yet the company still gave disappointing Q4 guidance back in late October. The street still is expecting tremendous growth in the current quarter, more than 48%, but the average estimate has come down by about $60 million in the past 4 months, which translates to about four percentage points of growth. Q4 is expected to start a long run of double-digit growth as seen below.
(Source: Seeking Alpha AMD estimates page, seen here)
The company is currently launching a ton of new chips, as the primary mission is to gain market share in the data center arena and steal business away from competitor and industry giant Intel (INTC). Just in the past month, there's been a variety of AMD chip news (here, here, here), which is also expected to drive some margin improvement. Part of the multi-year turnaround from AMD has been getting its bottom line from the red to green, with the company seeing its first yearly GAAP profit in some time during 2018.
As someone who has followed AMD for some time, I've noticed an interesting trend during the past couple of quarters. There's been a growing divide in street estimates for revenues during 2019 and 2020, where this year's numbers have been coming down but next year's have been going up. While part of that has been multiple guidance disappointments from management, it also means that expectations for next year have risen quite a bit. Take a look at the following estimate table for revenues, in billions.
(Source: Yahoo Finance analyst estimates page. *2020 growth rate based on 2019 estimate on that specific date)
The interesting part is that you can't just say estimates are pushing revenues from one year to the next. From early February to now, the average top line number for this year is down by $130 million, but next year is up by $330 million. That means that the revenue dollar increase for next year has gone from $1.34 billion to $1.80 billion, which is quite large. In percentage terms, that's a jump of more than 700 basis points of yearly growth, which equals a more than 37% increase in expectations.
The reason I bring up pressure on AMD doesn't just have to do with sharp rises in estimates combined with poor recent guidance. It also has to do with stock price, as shares are up more than 18.5% since that less than impressive Q3 report. In fact, AMD shares have rallied so much, they now trade at substantial forward looking premiums to Intel on both a non-GAAP P/E (35.92 to 12.40) and P/S (5.24 to 3.50) when looking at 2020 estimates. AMD does offer more growth at the moment, while Intel offers more stability and larger profits, as well as a massive capital return program.
The recent post-earnings rally also has chased away a bunch of non-believers it seems. Back in October, I detailed how AMD short interest had jumped to more than 150 million shares, which was a 14-month high. While there was a nice decline in the first half of October, it was the first half of November where things really changed as seen in the chart below. The more than 24.4 million share decrease in short interest in the first half of last month was the second largest since I started tracking this key item for AMD, only trailing a larger drop from back in March 2016.
(Source: NASDAQ AMD short interest page)
With just a few weeks left until the start of 2020, one name I think is under a bit of pressure to perform is Advanced Micro Devices. The chipmaker has seen management guide low two quarters in a row, yet shares have rallied to multi-year highs with the overall market. With a growing divide between yearly revenue estimates pushing 2020 estimates much higher, and the valuation stretching a bit, the company cannot continue to provide low guidance and not deliver on this large growth run that is supposed to be happening.
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