Shares of Advanced Micro Devices, Inc. (NASDAQ:AMD) soared 8% in extended trading yesterday after the company submitted its earnings card for the first-quarter. The earnings sheet strongly suggests that AMD’s growth is not only not slowing But that AMD is potentially looking at another year of revenue acceleration in FY 2022. Specifically, I expect AMD’s Data Center business to overtake Computing & Graphics regarding revenue contribution in the second half of 2022. Shares of AMD, given the firm’s potential in consumer and commercial markets, are undervalued!
AMD’s data center business is booming
I am going to make a strong assertion right here: I believe that AMD’s revenue growth and gross margins have not peaked yet, which suggests that the stock retains potential to revalue higher in 2022.
But before I explain why, let’s take a quick look at AMD’s Q1’22, which was just incredible. AMD’s total revenues in Q1’22 were $5.9B, showing 71% year-over-year and 22% quarter over quarter growth. Xilinx, whose acquisition AMD completed in February, contributed $559M in quarterly revenues to AMD’s top line. AMD guided for $5.0B +/- $100M in revenues for the first-quarter, so actual results were $200M better on an acquisition-adjusted level and $800M better when considering the Xilinx revenue contribution.
AMD’s Computing & Graphics revenues surged 33% year over year to $2.8B due to strong Ryzen (desktop and mobile) and Radeon processor sales as well as higher average GPU selling prices, especially for high-end Radeon graphics cards. AMD’s Enterprise revenues gained 88% YOY to a record $2.5B due chiefly to higher EPYC and semi-custom processor sales. EPYC processors are AMD’s flagship server CPUs that are responsible for AMD’s server market share gains in recent years.
In AMD’s first-quarter we can see the continuation of a trend that accelerated in FY 2021: The Data Center business is growing much faster than AMD’s Computing & Graphics business and it doesn’t show any signs of slowing down. For that reason, and because of the Xilinx acquisition, I AMD’s Data Center business to overtake Computing & Graphics regarding total revenue contribution in the second half of year.
AMD was also able to expand gross margins due to pricing strength in consumer and enterprise markets. AMD’s gross margin in the first-quarter gained 660 basis points year over year to 53%. Given the strength of AMD’s product line-up in consumer and commercial markets right now, I believe AMD could grow its gross margin further in FY 2022.
Xilinx acquisition: Possibility of more buybacks
Acquiring Xilinx is like throwing an accelerant on AMD’s already booming Data Center business. Not only does the acquisition expand AMD’s addressable market, but it allows AMD to leverage Xilinx’s chip architecture to broaden its customer base and make inroads into new markets. While the Data Center business is the obvious business segment that will benefit from complimentary product portfolios, the acquisition opens up new opportunities for AMD in 5G, wired communications, artificial intelligence and embedded technologies. I expect AMD (+Xilinx) to spend about $4.0B annually on research and development, which could create a result in additional revenue potential that the market may not even consider currently.
Because Xilinx has higher free cash flow margins than AMD, the acquisition is expected to be FCF accretive to AMD in the first year, meaning consolidated FCF margins are set to increase going forward…. Even without considering the impact the launch of new high-margin products is going to have on AMD’s free cash flow.
AMD achieved record free cash flow of $924M in Q1’22 and a FCF margin of 16%. Xilinx could add $1.0B in annual free cash flow to AMD by FY 2023 (potentially more) which could boost AMD’s FCF margins to the 20-25% range. The expected boost to free cash flow could also result in AMD seriously stepping up its share buybacks in FY 2023. AMD repurchased $1.9B of its shares in Q1’22 and has $8.3B in remaining authorization left. I expect AMD to exhaust its authorization completely in FY 2022 and predict that the company will announce another $10B buyback before the end of the year.
Why FY 2022 could be a year of revenue acceleration
The first reason why revenue growth could accelerate is because AMD is consolidating Xilinx in its financials. Xilinx added $559M in revenues from mid-February until the end of the quarter and I estimate that Xilinx could make a $4.5-$5.0B top line contribution resulting from the firm’s various businesses in FY 2022. The top line contribution could be even higher than that since Xilinx also experiences broad-based demand strength for FGPA and adaptive SoC products.
The acquisition of Xilinx’s Data Center capabilities will also allow AMD to expand on recent market share gains in the server market, where the company is putting heat on Intel (INTC). AMD has made steady server market share gains in the last few years, and the Xilinx acquisition as well as new server processor launches could accelerate AMD’s momentum in this vitally important market.
AMD just launched its 3rd Gen AMD EPYC processor with AMD 3D V-Cache Technology, dubbed Milan-X, in March. This promises up to 66% better performance (based on AMD’s internal testing). These new processors are built on AMD’s Zen 3 core architecture and expand AMD’s product offering in the server CPU market. Since EPYC processors have been a hit with customers in recent years, the new server CPU has the potential to see strong customer uptake in 2022.
New product launches are also expected in other segments, where AMD continues to make a splash with its Ryzen processors.
Ryzen processors are not only used by gamers, but also by designers and content creators that require high performance graphics solutions. To tap into this rapidly growing market, AMD recently launched Ryzen 6000 mobile processors and Ryzen 6000 PRO processors, which are set to make a revenue impact in the coming quarters. Later this year, AMD will release the Ryzen 7000 Series desktop processors, which are based on 5nm “Zen 4” architecture. The Ryzen 7000 Series benefit could from new equipment upgrades from gamers that remain the core target group for AMD’s gaming chips.
For those two reasons — Xilinx integration and new CPU product launches – I believe that AMD will see another year of revenue acceleration in 2022. After AMD added a material amount of dollars to its top line guidance for FY 2022, I also expect revenue estimates to rise even more strongly going forward as analysts refresh their updates.
AMD Outlook FY 2022
AMD’s outlook for Q2’22 calls for $6.5B in revenues +/- $200M and gross margins of 54%. For FY 2022, AMD expects $26.3B in revenues, indicating 60% year over year growth. The initial outlook for FY 2022 called for revenues of $21.5B, meaning AMD added $4.8B to its revenue guidance compared to the firm’s initial guidance.
To a large extent, this upgrade in guidance reflects the revenue impact Xilinx is expected to make. However, AMD’s strength in the server market and new product releases also likely contributed to the bullish outlook. What investors may want to keep in mind is that AMD always guides conservatively and routinely exceeded its quarterly revenue guidance in FY 2021, so the guidance for FY 2022 could even be further improved in later quarters.
AMD, despite a raised guidance for FY 2022 and record gross margins, only sells for 18.8 X (FY 2023) earnings and 5.1 X (FY 2023) revenues. Nvidia (NVDA), AMD’s largest rival outside the server market, is trading at much higher earnings and sales valuation factors.
Risks with AMD
The market expected in FY 2021 that semiconductor demand would slow and that AMD’s commercial growth would decelerate. This did not happen, and, given the refreshed guidance for FY 2022, I don’t believe a revenue deceleration will happen this year either. However, I could be wrong about that. Slowing top line growth (especially in the Data Center business), weaker gross margins and declining pricing strength for processors/graphics cards would indicate growing pressure on AMD’s valuation and growing risks for the stock.
My key assertion is that AMD’s revenue growth is currently unstoppable and will continue to accelerate in FY 2022 due to the Xilinx acquisition, momentum in data centers and new processor releases, especially in the server business. New EPYC and Ryzen product launches this year could lead to AMD raising its annual revenue guidance later this year as well.
AMD just raised its revenue guidance by 22% or $4.8B relative to the guidance submitted just 3 months ago. Given its potential for growth in consumer and commercial markets, AMD’s potential remains undervalued at a PE ratio of 18.8x!