MarketWatch First Take: AMD looks like a bright star in a darkened chip sector

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Advanced Micro Devices Inc. rode the success of new chips to its best quarterly results in years on Tuesday, making it the shining star of a semiconductor industry struggling through a downturn.

On Tuesday, AMD AMD, -1.96%  showed off its strongest quarterly revenue since 2005 and highest quarterly gross margins since 2012, as the second generation of its Epyc server chip made faster progress with customers, especially in the corporate enterprise market. The data-center market is where semiconductor companies have most notably struggled after years of gains, but AMD is finding growth there now while competitors head down the other side of that mountain.

The earnings news: AMD reports highest revenue in more than a decade

“In server, we had our highest quarterly CPU revenue since 2006 as strong second-generation Epyc processor demand drove a greater than 50% sequential increase in unit shipments and revenue,” AMD Chief Executive Lisa Su said on a conference call.

Personal computers also benefited from AMD’s new architecture, developed under Su’s stewardship of a company that was largely known for big ambitions that led to failed runs at Intel Corp. INTC, -0.74%  before she arrived. Sales in the computing and graphics business jumped 36% year-over-year to the highest total in that segment since 2011, as the PC market gets a boost from the coming death of Microsoft Corp.’s MSFT, -0.94%  Windows 7 operating system.

AMD’s strong growth in those businesses is being offset by a decline in its custom business, where it develops custom chips for videogame-console makers, but that appears temporary. While AMD said revenue from that segment was down 27% and expected to soften further, that is because it is ramping up to service new consoles that Microsoft and Sony Corp. SNE, +0.30%  are planning to launch next year.

More from Therese: Why AMD believes it can challenge Intel in servers

With AMD’s strongest performance in years across multiple segments, and a windfall potentially waiting next year from the new Xbox and PlayStation models, investors should be celebrating. It appears even more was expected, though, after a huge run-up in the stock price: AMD shares are up almost 79% in 2019, the third-best gain in the S&P 500 index SPX, -0.08%  . Shares bounced around in late trading, eventually ending the session down about 1%.

The fears appeared to be focused on AMD’s holiday-season guidance and its record-high gross margins, which analysts hoped would be even better. AMD’s fourth-quarter forecast calls for sales of $2 billion to $2.15 billion, barely touching the consensus estimate of $2.15 billion, while margins were mentioned more than a dozen times in the question-and-answer session of the conference call.

“I guess I’m just surprised not to see them up more both in the quarter as well as in the Q4 [forecast],” said Stacy Rasgon, a Bernstein Research analyst, reflecting a dominant theme.

See also: Intel suggests the chip recovery is here, even as rivals are still waiting

AMD’s gross margins were 43% of total revenue in the third quarter, up from around 41% sequentially, and the company is forecasting margins of around 44% in the fourth quarter. AMD executives noted that the company’s current product mix still includes its older, less profitable products, which is dragging on margins somewhat.

“You have to look at the mix of the product relative to the total revenue of the company,” said AMD Chief Financial Officer Devinder Kumar.

Instead of looking for warts, though, Wall Street should step back and appreciate the great strides AMD has made with its new product lines after five years with Su in charge. Long the sad stepsister of the semiconductor sector, AMD is now the shining star.

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