Portfolio holding Advanced Micro Devices (AMD) reported a fantastic fourth quarter earnings result after the closing bell Tuesday. To cheer the results, stock traded up 10% in after-hours session.

Revenues increased 49% year-over-year (the sixth straight quarter of +45% YoY growth) and 12% quarter-over-quarter to $4.826 billion, beating the consensus analyst estimate of $4.523 billion, according to FactSet. In addition to the impressive top-line growth, fourth-quarter adjusted gross margins increased 560 basis points YoY and 190 basis points QoQ to about 50%, which is higher than the 49.4% analysts were looking for. Adjusted earnings per share increased 77% YoY and 26% QoQ to $0.92, well above analyst expectations of $0.76.

Breaking Down The Results

In the computing and graphics segment, revenue increased 32% YoY and 8% QoQ to $2.584 billion, topping estimates of $2.418 billion. Revenue growth was driven by Ryzen and Radeon processor sales.

• AMD delivered record client computing revenue, which grew by a double-digit percentage from a year ago, thanks to record notebook sales and higher average selling prices. 

• The company saw strong demand for premium AMD notebooks and higher-end desktop CPUs in the quarter, with Ryzen 5000 processor unit shipments up by a double-digit percentage sequentially.

• In graphics, revenue more than doubled YoY for the third straight quarter, with data center graphics revenue also doubling thanks largely to high-performance computing wins for AMD’s latest instinct MI200 accelerators.

In the enterprise, embedded and semi-custom segment, revenue increased 75% YoY and 17% QoQ to $2.242 billion, topping estimates of $2.099 billion. Revenue growth was driven by higher sales for EPYC processors and semi-customer products. 

• Remember, AMD’s semi-custom business sells into the popular gaming PlayStation 5 and Xbox Series X/S next-generation consoles which are currently going through a cycle that is outpacing all prior generations. The demand has been that strong. 

• In the server business, revenues once again doubled YoY and increased by a double-digit percentage sequentially driven by demand across both cloud and enterprise customers. 

• Cloud revenues more than doubled YoY as the largest providers expanded internal deployments and more than 130 new AMD-powered instances launched across some of the biggest players in the space. Think Amazon Web Services, Alibaba, Azure, and Google. 

• In enterprise, revenues double YoY thanks to the ongoing ramp of more than 100 3rd generation EPYC platforms. 

Forward Guidance

Turning to the company’s outlook, management provided an upbeat view of what to expect this year. For the full year 2022, AMD expects revenues to grow 31% YoY to approximately $21.5 billion. This outlook is solidly above expectations of about $19.293 billion. AMD also forecasts adjusted gross margins to be approximately 51%, up from 48% in 2021 and stronger than expectations of about 50%. 

For the first quarter, AMD expects revenues to increase approximately 45% YoY and 4% QoQ to $5.0 billion, plus or minus $100 million, with YoY growth across all businesses and sequential growth driven by higher server and client processor revenue. This view is well above analyst forecasts of about $4.3 billion.

On margins, AMD expects adjusted gross margins for the first quarter to be approximately 50.5%, which is much stronger than analyst forecasts of about 49%. The company continues to see its margins expand year after year as its data center business becomes a larger part of the company and as the mix within the Client and Graphics business improves. 

Update On The Xylinx (XLNX) Acquisition 

AMD is finally closing in on its acquisition of Xilinx. An important milestone was reached on January 27th, when China’s State Administration for Market Regulation approved the transaction. The last remaining regulatory hurdle is the Free Trade Commission approving AMD’s HSR refiling for acquisition. Management expects the deal to close in the first quarter of 2022. Remember, we like this deal for its diversification benefits. The outlook provided by AMD does not include the acquisition of Xilinx, meaning that estimates will go even higher after the deal is closed. 

Capital Return To Shareholders 

The company first announced a $4 billion share repurchase program in 2021, and management has put that cash to good work ever since. AMD repurchased $756 million of stock in the fourth quarter, but get this: AMD said on the call tonight that they have already bought back $1 billion of stock to date in the first quarter. This is very noteworthy and is a sign that management views the recent volatility in the stock as an opportunity.

Bottom Line

AMD is firing on all cylinders. The company delivered an impressive quarter that was driven by market share gains and continued growth in the data center, which now represents a mid-20 percentage of the company’s overall revenue. Plus, management is executing on an extremely high level as they are successfully navigating a tight supply environment. With the closing of the Xilinx acquisition on the horizon, AMD remains one of our favorite names in the semiconductor industry, and the star of our portfolio.