AMD Reports Earnings Tomorrow. Here’s What To Expect.

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For chip maker

Advanced Micro Devices,

its upcoming earnings report will test whether the company can continue to grow into its swollen valuation.

Now the third most expensive stock in the

PHLX Semiconductor index,

AMD’s (ticker: AMD) latest results are expected Tuesday after the closing bell. Investors will be closely watching for evidence that the company continues to chip away at the dominance of its larger rival

Intel

(INTC).

For the company’s fourth quarter, analysts are forecasting adjusted earnings of 47 cents a share on sales of $3.02 billion. AMD divides its business into two broad segments. Computer and graphics is expected to generate sales of $1.83 billion. Its second segment includes its data center business and revenue from the custom chips designed for next generation videogame consoles; it’s expected to bring in revenue of $1.21 billion.

Similar to Intel, which reported earnings last week, AMD is likely benefiting from strong personal computer sales as more people work from home. Citi Research analyst Christopher Danely wrote in a client note early Monday that he expects shares to rise after earnings because of a favorable environment surrounding the company—a weaker Intel, has benefited AMD’s computer and data center chip sales. The analyst expects demand for PCs to slow by the second half of this year.

Wall Street is generally bullish on Intel shares, with 60% of analysts rating the stock at Buy or its equivalent. The mean price target, at just under $96 a share, implies minimal gains for the stock, though. It closed Monday at $94.13.

Roughly 10% of analysts rate AMD at Sell, including Citi’s Danely. He says there’s likely to be a price war between Intel and AMD.

Beyond taking market share from rival Intel, AMD is set to benefit from the new videogame systems that

Microsoft

(MSFT) and

Sony

(SNE) launched last year. Demand for the systems has been high, as more people have turned to videogames for entertainment during the Covid-19 pandemic. But the videogame hardware makers have also had to contend with pandemic-related supply chain disruptions that have caused chip shortages. Investors may get some visibility into those supply chain issues from AMD executives on Tuesday.

While the new console systems will boost the top line, the yield on the new semiconductors will likely be less favorable on the first batches of chips—as with many new customized processors—eating into AMD’s profit margins. That will change over time, which RBC Capital Markets analyst Mitch Steves says could be some time in the first half of the year.

In October, AMD announced that it planned to buy

Xilinx

(XNLX) for $35 billion in stock, a deal that promises to transform both companies. Xilinx is known for its programmable chips, which are useful for emerging technologies that don’t already have semiconductors specifically designed for them. The deal is expected to close by the end of the year, and investors could get a progress update on the earnings call.

Shares of AMD are up 85% in the past year, compared with the benchmark PHLX Semiconductor index’s gain of 59%. The

S&P 500

has advanced 17% over the same period.

Write to Max A. Cherney at max.cherney@barrons.com