The fast-spreading coronavirus is set to paralyze the global economy. It is estimated that the economic disruption related to the coronavirus will cost the world economy over $280 billion in the first quarter of the year. Major US corporations, long passed the point of mere speculation, have come out recently to warn the imminent financial impact of the coronavirus. Since both U.S. semiconductor's production and revenue heavily rely on China, they have been expected to be hit hard. In particular, as Advanced Micro Devices (NASDAQ:AMD) has close to 25% China revenue and more than 30% Greater China supply chain exposures, it is reasonable to expect AMD will be most significantly and negatively affected by the coronavirus. Therefore, the purpose of this article is to estimate the economic impact of the coronavirus on AMD.
For the tech sector, coronavirus will have an immediate supply effect on key component shipment, such as LEDs and memory capacity at Samsung (OTCPK:SSNLF) and SK Hynix (OTC:HXSCF). This reflects the reality of tech supply chain's over-reliance on China. The obvious implication is that it can slow down demand and inflate the already finished goods inventory from last year's trade dispute. As a result of the widespread shutdown, critical components will pinch the global supply chain's ability to fulfill demand. As it will take at least a quarter to let the uncertainty to settle and an effective vaccine will take at least a quarter or two to develop, the pinch on Q3 supply is a foregone conclusion.
As Q3 is the peak chip demand, original equipment manufacturers (OEMs) started acknowledging the possibility of the inevitable negative earnings impact after the shutdown in China has not seen signs of relief. To assess the extent of the supply pinch, a dozen of AMD's Greater China suppliers were identified, but with little quantifiable information (Table 1B). While the sales of most of AMD's China suppliers are not identifiable, the most useful suppliers data is from Taiwan's United Microelectronics' (UMC) $31.98M (3.12%) and Taiwan Semiconductor Manufacturing's (TSM) $282.37M (27.57%). At this time, Taiwan authority has not yet reported any evidence of a widespread infection or any interruption in production at TSMC. Though, investors should watch the development of virus impact on Taiwan closely, especially on TSMC, since it is AMD's largest supplier and responsible for more than 25% of the cost of goods sold.
The prolonged interruption of supply chain will inevitably translate into wider slowdown in demand. For companies that have significant China revenue exposures, the lockdown and shutdown have created a negative impact on the (global) economy, which demands their products. For 2019, AMD generated $1,750 million (26%) revenue from Greater China Area, including China, Taiwan, Hong Kong, and Macau. Bloomberg Supply Chain Database was able to identify 61 China customers for the quarterly amount of $477 million (Q4 2019) or 24.66% of the total quarterly revenue. For the sake of brevity, Table 1A only lists the top 16 customers. The demand concern of the coronavirus impact is mainly on the China domestic consumer side, which is more adversely affected through the lower GDP growth. Though AMD's top customers, such as Lenovo (OTCPK:LNVGY), Huawei, Acer, and Tencent (OTCPK:TCEHY), also have significant non-China market share, it is less likely that their demand will be seriously at risk. For all practical purposes, the scope of the demand impact may well be lower than the 25% revenue exposure.
As it is extremely difficult to forecast the actual changes in both AMD's demand and supply due to the coronavirus, I look for other sources of information. Since the outbreak began in early December, the market quickly drew comparisons to the Severe Acute Respiratory Syndrome, or SARS, epidemic in 2003 that left 8,096 sick and killed 774, according to the World Health Organization. During SARS, AMD has openly attributed the revenue miss by about $100 million (14%) and $0.05 (10%) EPS miss to a result of the SARS (Table 1 & Table 2).
Today, because of the widespread factory shutdown and the cities lockdown, both the production and the China sales will be severely hampered. It is widely agreed that the negative impact of the coronavirus is worse than that of SARS, considering both the magnitude of China relevance and reliance have been increased significantly since 2003. It is reasonable, therefore, to assume that AMD's SARS 14% revenue miss and 10% EPS miss may be the lower bound for the potential damage from the coronavirus.
Although the estimated magnitude of the coronavirus impact on AMD looks modest at this time, but it may deteriorate real fast and real soon. Yet, there is evidence that investors have been complacent: U.S. equity markets stretched to record highs last week again, while the virus is not yet peaked. Stocks have remained strong, even though S&P 500 companies received 4.3% of their revenue from China in 2018, according to S&P Global. Meanwhile, Hong Kong-based analysts at the Japanese investment bank Nomura are "concerned that markets thus far appear to be significantly underestimating the potential economic impact" of the outbreak.
Specifically, for AMD, despite the Q1 downside guidance, the stock has still advanced more than 10% since the outbreak. It does not look like that AMD share price has reflected the 10%-14% potential SARS-like losses from the coronavirus. The silver lining is that the coronavirus will be a one-two quarters event. As a result, the demand delay and the supply shortage shall pass, too. AMD share price should at best adjust downward one time for the amount of the revenue reduction, say 10%. But it should recover as soon as the uncertainty of the coronavirus resolution is removed.
This article was written by
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