Markman Capital Insight

AMD Crushes Earnings As New Chip Leadership Emerges - Leaving Intel In The Dust

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Sales of semiconductors are running red hot, even as the shares of the leading chipmakers swoon. Something is terribly amiss. It’s a sign of the times.

After the close on Tuesday executives at Advanced Micro DevicesAMD (AMD) reported blow-out first quarter earnings, and gave strong guidance for the next quarter. AMD stock rose moderately.

The share price performance is important. It’s not time to buy semiconductor stocks.

Chip stocks have been under pressure all of this year. Van Eck Vectors Semiconductors  (SMHSMH), a widely tracked exchange traded fund that holds shares of most of the largest chip firms, is down a whopping 23.5% so far this year.

The technical reason for the weakness is the value of future growth shrinks as interest rates rise and borrowing costs increase. It’s a stock market theory that is more self-fulfilling than evidentiary. Many of the largest tech concerns have strong balance sheets. Their access to capital is excellent. MicrosoftMSFT (MSFT) is less impacted by higher borrowing costs than industrial and resource firms, that tend to be highly leveraged.

There is another factor depressing tech share prices: The legacy effect.

Although the sector is continually evolving and new winners are emerging, sentiment is usually driven by the oldest and most well-known businesses. IntelINTC (INTC) has been a terrible business for a decade. A parade of executives have issued a constant stream of bleak forecasts that color the way investors feel about the sector.

Only a week ago that Patrick Gelsinger, chief executive officer, pointed to weak PC demand and macroeconomic challenges as the reason for yet another weak quarter. Documents filed at the Securities and Exchange Commission show that revenues decreased by 7% to $18.35 billion.

Analysts immediately began downgrading the entire sector.

Morgan StanleyMS researchers surmised that the so-called “covid pull forward” is a giant headwind akin to the Year 2000 computer bug. The big idea is that covid and work from home forced an acceleration in capital expenditures. Pulling forward those sales into 2021 means there is less money (and need) for future new PCs.

It’s a cool theory, for 2010.

Semiconductor demand is so much more than PCs. Chips are now integral in automotive, robotics and infrastructure. And the cloud is the future of computing. Management teams at forward-looking companies have been cultivating those sales for years.  

The AMD earnings report on Tuesday paints that picture. Business is great, and growing. All of its business segments posted double digit gains. The Santa Clara, Calif.-based company is winning market share from Intel in PCs, while it grows rapidly in the cloud.

Specifically, sales of chips for PCs rose 33% on an annualized basis, and were 8% higher sequentially, according to a report at CNBC. Sales of semiconductors sold into the red-hot cloud server and game console markets rose 88% to $2.5 billion.

For context, overall revenue during the quarter was $5.9 billion, up 71% year-over-year. And the company guided analyst expectations for the second quarter to $6.5 billion, a nice bump over the previous forecast of $6.38 billion.

Despite the impressive beat AMD shares rose only 4% in after-hours trade. The upshot is share prices are not always about the fundamentals of the underlying company. More often businesses, good and bad are swept up in larger narratives. Currently tech shares are out of favor as interest rates rise.

It does help to separate the good companies from bad. AMD is clearly one of the good ones.

At a price of $91.13, shares trade at only 19.6x forward earnings and 9.4x sales. The firm has gross margins of 48.2%, and the return on equity is an impressive 44.9%.

Shares rallied in December to $165. That price is definitely achievable again, yet I would not rush to buy shares at current levels. A more suitable entry level is following a close above $102.