Chip earnings to be a big test for some tech stocks

Advanced Micro Devices Inc. earnings will be an important indicator as to whether the semiconductor outlook is weak in early 2022 or just weak for certain companies.

AMD AMD is scheduled to report earnings on Tuesday after the bell, as the PHLX Semiconductor Index SOX tumbles to the brink of a bear market. Chip stocks have struggled of late as a majority of chip and chip companies reporting earnings have presented weak outlooks for the current quarter.

Intel Corp. INTC, Lam Research Corp. LRCX, KLA Corp. KLAC, and Western Digital Corp. WDC, all reported forecasts that fell short of Wall Street expectations, with Texas Instruments Inc. TXN and NXP Semiconductors NV NXPI being the only companies that forecast a better than expected outlook. Cowen analyst Matthew Ramsay expects AMD to join them, with solid results as well as another round of aggressive forecasts.

Ramsay, who has an outperform rating and a $150 price target on AMD, believes that AMD has the capacity to deliver upside, which would have been higher with better supply, even after raising guidance several times through 2021, from 37% to 50% to 60% to now 65%.

Chip sector flirting with bear market territory as semiconductor earnings kick off.

Management expects to set an aggressive, but achievable outlook for 2022 that shows continued PC and server share gains, including enterprise, while still leaving room to raise numbers through the year, as supply improves further, the Cowen analyst wrote.

The previous quarter of AMD was so strong that analysts had difficulty nitpicking results three months ago. One milestone to watch is if AMD's profit margins meet or exceed the 50% threshold, which has become more significant as Intel executives try to keep their margins comfortably above 50%, or in the 52% to 53% range for the year. AMD reported margins of 48% in the third quarter, up from 44% in the year ago period, but unchanged from 48% in the second quarter.

Investors would welcome news on a big deal closing. With Nvidia Corp.'s NVDA deal to acquire Arm Ltd. falling apart, that makes AMD's conditional regulatory approval from Chinese regulators for its $35 billion deal to acquire Xilinx Inc. XLNX even more significant. AMD said last year it expects the deal to close this quarter.

AMD announced a $200 graphics card and a lot of new products at the CES earlier in the year.

Earnings: AMD is expected to post adjusted earnings of 76 cents a share, up from 52 cents a share reported in the year-ago period, according to a FactSet survey of 32 analysts. Estimize, a software platform that gathers estimates from hedge-fund executives, brokerages, buy-side analysts, and others, calls for earnings of 81 cents a share.

Revenue: AMD, on average, is expected to have revenue of $4.52 billion, according to FactSet, up from $3.24 billion reported in the year-ago quarter. AMD had predicted $4.4 billion to $4.6 billion. Estimize expects to have revenue of $4.61 billion.

Shares only gained about six months ago when the stock was close to 13% six quarters ago, while AMD's earnings and sales have topped Wall Street estimates over the past six quarterly reports.

AMD shares are firmly in bear market territory, down 29% off their closing high of $161.91 set on Nov. 29, but have gained 31% over the past 12 months. The SOX index has gone up nearly 13% in the time, the S&P 500 index SPX has gained 20%, and the tech-heavy Nasdaq Composite Index COMP has gained 6%.

Over the fourth quarter, AMD shares fell 27%, as the SOX index rose 21%, the S&P 500 index increased nearly 11%, and Nasdaq gained 8%.

What analysts are saying?

Bernstein analyst Stacy Rasgon, who has a market perform rating and $130 price target, said AMD s execution remains strong.

The share position continues to improve especially in notebook and server, according to Rasgon. The company's full-year guidance suggests Q 4 gross margins reaching within the spitting distance of 50%, and Street estimates going forward seem fairly unaggressive and at levels below long term targets. The company is beginning to return fairly material amounts of cash, according to Rasgon. While PCs will do what they will, we do believe AMD is capitalizing well as Intel enters the transition, and at a minimum our negative Intel call should be fueled by the fact that Chips may be sold out for 2022 due to shortage, but investors are worried about the end of the party.

That PC concern was the cause of Piper Sandler analyst Harsh Kumar downgrading AMD to neutral earlier in the month. The cooling comes after two big back-to-back years for PC sales that reached shipment levels not seen in a decade because of COVID.

Christopher Rolland, a Susquehanna Financial analyst who has a positive rating on AMD, said the chip maker's server road map continues to march forward. AMD plans to release 3 D VCache Milan-X in 1 H 22, followed by Zen 4 Genoa by the end of the year, Rolland said. While Genoa may have been experiencing similar DDR 5 validation issues as Intel s Sapphire Rapids, we have not come across rumors of delays for AMD s servers. Jefferies analyst Mark Lipacis, who has a buy rating and a $145 price target, notes how AMD is growing their share of the CPU market while Intel declines.

Intel's share declined by 150 bps to 78.9% from 80.4% in Oct- 21 as AMD's share rose by 240 bps to 14.5% from 12.1%, Lipacis said.

22 of the 40 analysts covering AMD who are tracked by FactSet rate shares have the equivalent of a buy, 17 call it a hold and just one calls the stock a sell. The average price target as of Friday afternoon was $145.92, representing a 27% premium to the going rate.