AMD crushes earnings as the semiconductor braces for change

The semiconductor industry is going through a massive change — which could change investors’ outlook on the sector. AMD (NASDAQ:AMD) is giving us a taste of what’s to come this year — via their fourth quarter earnings — and investors are hungry for more…

Bright future for semiconductors

In 2021, semiconductor companies had their best year ever — with sales exceeding $500B for the first time and stocks hitting all-time highs.

• Massive demand and supply shortages sent semiconductor sales and profits up — with no end in sight.
• Getting to $500B took 50 years but one chip CEO expects the industry to pass $1T in the next 10 years.

Last week, Biden warned of manufacturers’ dangerously low chip supply.

• Demand is 40% higher than what one semiconductor supplier — ASML Holdings (NASDAQ:ASML) can produce (via WSJ).
• The price of silicon wafers — a key component of semiconductor chips — is expected to rise 5-15%.

AMD rises at Intel’s expense

2021 was a massive year for AMD — who beat sales and earnings expectations in their fourth-quarter earnings report — rapidly gaining ground on Nvidia and struggling Intel.

• $16.4B in 2021 sales — up 68% from 2020 with gross margins increasing to 48% from 45%.
• Cloud servers and game console’s segment grew 75% — with AMD expecting growth to continue.
• Repurchased $1.8B of its own shares in 2021 and spent $1B to secure long-term production capacity.

Wedbush Securities analyst sees “zero red flags” (via SA) with AMD, forecasting 2022 to exceed expectations — with $21.5B sales in 2022 — a 31% jump from 2021.

Added bonus: Last week, AMD was approved by Chinese regulators to purchase Xilinx — allowing AMD to expand into automotive and data center chips.

Investors: Ditching its cyclical nature?

The semiconductor industry has a cyclical history — prone to periods of expansion and contraction. This was due to the long time to get new production online — often taking years which leads to oversupply.

• The industry risks running into oversupply in the coming years if chipmakers overproduce — per Bain & Co.
• If demand unexpectedly slows and increased investments into new production leads to oversupply — stocks could fall.

New chip demand from emerging industries (artificial intelligence, electric vehicles, etc.) could help prevent semiconductors from reverting back to a cyclical industry. For now, the industry is benefitting as it continues to face a supply shortage issue.

More info: Fabricated Knowledge has a good long-form article explaining the cyclical nature of semiconductors.