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AMD’s Short-Term Earnings to Reflect GPU Headwinds

AMD’s near-term GPU headwinds to reflect in earnings

Previously, we saw that Xilinx (XLNX) and Intel (INTC) are set to report strong earnings for the December 2018 quarter. Even Advanced Micro Devices (AMD) is on a growth spree and is expected to benefit from strong demand for PC and server CPUs (central processing unit). However, its exposure to the discrete GPU (graphics processing unit) market, which was a tailwind in early 2018 during the crypto boom, could turn out to be a headwind in the fourth quarter of 2018 and first half of 2019.

A6_Semiconductors_AMD INTC NVDA QoQ rev growth rate

AMD’s and NVIDIA’s (NVDA) GPUs witnessed unexpected demand growth in early 2018 as crypto miners were using their GPUs to mine currency. However, the crypto-related demand vanished in the third quarter of 2018, and in the fourth quarter of 2018, the secondary market was flooded by secondhand midrange GPUs purchased during the crypto boom. The retailers were forced to clear excess inventory at a discount to make way for new GPUs, thereby impacting their ASPs (average selling price) and profit margins.

At a time when the GPU market was grappling with excess inventory, NVIDIA halted shipments of its mid-range GPUs, but AMD launched a Polaris refresh Radeon 590 GPU. Both the factors pulled down the price of AMD’s Radeon 580 GPU by 20.8% in the fourth quarter of 2018.

AMD’s computing strength

In the third quarter of 2018, GPU weakness was partially offset by CPU strength, sending AMD’s revenue down 6% sequentially to $1.65 billion. This revenue came before the GPU market was hit by excess inventory. AMD expects its fourth-quarter revenue to fall 12% sequentially to $1.45 billion, whereas NVIDIA expects its revenue for the fiscal 2019 fourth-quarter, which ended in January 2019 to fall 15% sequentially.

There is a possibility that AMD might report weaker-than-expected fourth-quarter earnings on January 29. However, it remains to be seen how much CPU sales growth can mitigate the declining GPU sales. Looking beyond the GPU headwinds, AMD is set to witness strong growth in the PC and server CPU markets and take some market share from Intel with its 7-nm products.

A day after AMD’s earnings, Qualcomm is set to announce its fiscal 2019 first-quarter earnings. We will look into this next.

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