1/30//20 Best is STILL yet to come

AMD had reported Q4 2019 and guided for 2020. Initial market reaction was of disappointment. Share price went down 3 the following day, despite many analysts continuing to set price target at high 50’s into the 60’s. Fortunately, AMD had now settled just under 49, which is around where it was during the run up to CES earlier this month.

To review, total revenue came in at $2.13 B, which is at high end of previous guidance. It is significant to note that Computing and Graphics came in at $1.66 B, even higher than the consensus of $1.5 B. Ryzen and Radeon had indeed sold very well. Enterprise, Embedded and Semi-custom came in at only $465 M instead of $604 M. This shortfall was strictly due to sale of consoles going away almost completely.

Considering the hype that is already building up for the next gen consoles, featuring ray tracing, 8 cores of 7 nm Zen 2, Radeon RDNA2, fast RAM and fast SSD, anyone who could wait will definitely wait and get all that goodies for a mere $499. As an aside, why wouldn’t Microsoft allow the next gen XBox Series X also to boot into Windows? It would be a very capable PC.

The key is Enterprise. According to this Nextplatform article, AMD sold $82 M of Radeon Instinct GPUs (half of that for Google Stadia) and $232 M of Epyc, for a total of $314 M in Q4. For the whole year AMD likely did nearly $1 B of datacenter business, or about 15% of its total revenue.

Lisa Su then guided $1.8 B for Q1 2020, and whole year to be 28-30% higher than 2019, which equals $8.75 B. AMD also guided for GM of 45%, CAPEX at 28%. With tax rate of only 3%, and interest payment rapidly decreasing (more on that later), AMD is telegraphing EPS 2020 of almost $1.20. In 2017 AMD had provided long term financial model of making 75 cents by 2020. Last year AMD declined to update that projection. Now AMD had just calmly blown out that target, and where is the applause?

Instead, some analysts focused on the $1.8 B for Q1 2020. This seemed underwhelming, but it would be the best Q1 AMD had ever produced. Q1 2019 was only $1.27B. One can argue that consoles will be even less in 2020, so where are the extra $530 M coming from? Furthermore, for AMD to earn $7 B for the rest of the year, it needs to average $2.3 B per Q. Well, AMD has never done $2.3 B in any Q, ever.

This Reddit post summarized well all the analysts’ PT.

I think Hans Mosesmann said it best. His notes can be found in this Reddit post from Long_on_AMD.

Hans had updated his EPS for 2020 to $1.20 and $2.25 for 2021.

So maybe it is possible that by the end of this year, say after Q3 2020 and just before the November US election, the market may apply a PE of 40 to that EPS, during the launching of PS5, XBox Series X, with Milan, Zen 3 and Big Navi already selling like hotcakes? Let’s not forget the Samsung-AMD partnership on their joint GPU for the mobile market, due in 2021.

By the way, AMD paid down $524 M of debt in Q4 2019 alone, and nearly $1 B for the whole year. Cash is at $1.5 B, higher than ever. Free cash flow was $400 M! The balance sheet is pristine. Getting rid of the 7% senior notes due in 2024 is nice.

Jim Cramer’s interview of Lisa Su on CNBC can be seen, here.

Anandtech’s Dr. Ian Cutress did a nice summary of earnings report, here.

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