Advanced Micro Devices (AMD) reported better than expected second-quarter earnings after the closing bell Tuesday.

On the top line, sales of $3.850 billion (+99% YoY; +12% QoQ) exceeded estimates of $3.620 billion. Meanwhile, adjusted earnings per share of $0.63 (+250% YoY; +21% QoQ) beat estimates of $0.54 per share. Additionally, adjusted gross margins of 48% (+4 percentage points YoY; +2 percentage points QoQ), was above street estimates of 46.9% with the expansion driven by a richer mix of sales in products like high end Ryzen, Radeon, and EPUC processors.

"Our business performed exceptionally well in the second quarter as revenue and operating margin doubled and profitability more than tripled year-over-year," said AMD President and CEO Lisa Su. "We are growing significantly faster than the market with strong demand across all of our businesses. We now expect our 2021 annual revenue to grow by approximately 60 percent year-over-year driven by strong execution and increased customer preference for our leadership products."

Reviewing AMD's individual segments, Computing & Graphics sales were $2.25 billion (+65% YoY; +7% QoQ), edging estimates of about $2.169 billion. Segment operating income came in at $526 million, representing an increase from $200 million last year and $485 million from the year ago quarter, driven by higher revenue.

Driving the strong performance was growth in both Ryzen and Radeon processor sales. AMD also posted another record quarter of processor revenue in client computing.

Within the segment, Client Processor average selling price (ASP) grew both year-over-year and quarter-over-quarter, thanks to a larger mix of Ryzen desktop and notebook sales. Management said they believe they picked up revenue share for the fifth straight quarter in desktops and notebooks.

The PC market is always something to monitor with AMD, especially as the past 12 months have been a great time to be in this business thanks to hybrid work and remote learning activity. Here is what Su had to say about the state of the PC market during the conference call:

"When I look at the market, I would say that we've performed very well. Within this market backdrop, we continue to gain revenue share. And what that means is we're focusing on the most strategic segments of the PC market. As we go forward, I do agree that end-user demand is strong. I also believe that if you look at the second half of this year for the PC market, you'll hear about sort of pockets of component shortages or match sets and things like that.... From our perspective, we're planning the PC business to be about flattish, first half into second."

Su's comments about a flattish PC market next year could be one reason why the stock is not trading as high as one would think to the beat and raise result.

Meanwhile, GPU ASPs were also higher year-over-year and quarter-over-quarter, driven by high end Radeon graphics products, including data center GPU sales. Data center graphics revenue more than doubled YoY in the quarter thanks to new deployments of the AMD Instinct accelerators, including initial shipments of their next-gen data center GPUs with CDNA2 architecture. This new CDNA 2 architecture delivers more than twice the performance than competitive offerings in HPC workloads.

It's also worth mentioning that AMD believes crypto demand did not play a significant role in the quarter.

In the Enterprise, Embedded and Semi-Custom segment, sales of $1.60 billion (+183% YoY); +18% QoQ) edged consensus estimates of about $1.441 billion. Driving the revenue growth in the quarter was semi-custom and EPUC processor sales. The higher revenue led to a nice increase in segment operating income, which grew to $398 million in the quarter, up from $33 million one year ago and a $77 million in the prior quarter.

Semi-custom sales grew on both a sequential and YoY basis, and management anticipates strong console demand through the year. One announcement that management also brought up, and we believe may be underappreciated as well, was the new semi-custom that will power the Steam Deck handheld game console that is expected to launch in December.

In embedded, management discussed the progress they are making to increase their presence across key verticals such as automotive, networking, and storage.

In Server, AMD delivered its fifth straight quarter of record server processor revenue with sales up by a "significant" double-digit percentage sequentially thanks to higher unit shipments and ASP. Some other notes are that AMD is seeing very strong demand across its full server portfolio. Meanwhile, AMD called out how third-generation EPYC processor revenue is ramping faster than prior generations out of customer recognition of its superior performance. It also appears that AMD's share gains have accelerated this year.

Turning to the cloud, AMD said demand for its product "further accelerated" in the quarter, led by growing internal workload adoption and almost 50 new AMD-powered instances by Amazon Web Services (AMZN) , Microsoft Azure (MSFT) , Google (GOOGL) , Tencent (TCTZF) , and Alibaba (BABA) . Lisa Su also highlighted how Google recently announced it chose AMD EPYC processors to exclusively power its first offering in its new Tau VM family.

And in the enterprise, AMD said it is seeing demand accelerating as more than 100 third-gen EPYC processor platforms are in production from HP (HPQ) , Lenovo (LNVGF) , Super Micro (SMCI) , Cisco (CSCO) , and others.

As for the data center business as a whole, revenues nearly doubled YoY in the quarter. Management expects data center revenue to continue to grow faster than the company's overall revenue growth rate based on the strength of their EPYC processors, Instinct accelerators, and the relationships they have with leading OEMs.

Turning to guidance, AMD expects third quarter results to be approximately $4.1 billion, +/- $100 million. This represents YoY growth of 46% YoY and 6% QoQ. Additionally, this is stronger the the $3.82 billion consensus forecast. Management expects the YoY growth to be driven by all businesses, while the sequential growth is expected to be primarily driven by growth in the data center and gaming businesses. On the margin front, adjusted gross margins are expected to be 48%, and that's slightly higher than estimates of 47.1%. It's looking like the implied EPS guidance for the third quarter is somewhere around $0.65, which is well above estimates of $0.56.

How about the full year? AMD now expects 2021 revenue growth to be approximately 60%. This a raise from management's prior guidance of 50% and implies a full year result of $15.621 billion which is well above the $14.646 billion estimate. Additionally, this new guidance taken with the third quarter outlook implies fourth quarter sales of about $4.226 billion which is nicely above estimates of $3.88 billion. For the full year, management now expects adjusted gross margins of 48%, representing an increase from their prior guidance of 47%. Longer term, management believes they can push margins greater than 50%. All in all, this was another beat and raise by AMD.

Let's also talk about the buyback. AMD announced a share repurchase program - the first in company history - of $4 billion back in May when the stock traded in the mid $70s. During the quarter, AMD repurchased 3.2 million shares for $256 million. This equates to an average price of about $80 per share, making this a great and very opportunistic use of capital with the stock trading at $91.03 as of today's close. By the way, AMD generated record free cash flow this quarter and has generated $1.7 billion in the first half of the year, more than double 2020's annual free cash flow.

It also wouldn't be a earnings report for a semiconductor company without addressing the demand environment and supply constraints. Here is what Su had to say on the topic:

"I think it's fair to say that the semiconductor demand environment and particularly, the AMD demand environment has been very strong in 2021. We've been working on supply for the past couple of quarters. I think I'm actually quite pleased with the progress that we've made in terms of increasing our supply. And what I've said previously is, certainly, we do see some level of constraints, but we are making progress each quarter and we made progress in the second quarter that enabled us to exceed the original guidance. And as we go into the second half of the year, we're continuing to bring on extra supply each quarter, which is leading to the full year guidance raise that we have."

Lastly, there was not much new news about the Xilinx (XLNX) acquisition. Management continues to believe the deal is on track for a end of year close. As a refresher, we like the Xilinx deal for its diversification benefits, as it will give AMD market-leading exposure to high performance technologies in 5G communications, industrial and aerospace, and automotive markets. The transaction is also expected to accelerate AMD's growth in the data center.

Overall, this was another strong quarter for AMD, and management's confidence in its future was apparent once again through the big raise to the full-year outlook, which implied upside over the second half of the years. Every time we read the AMD quarter, we cannot help but think the company is separating further and further away from Intel (INTC) . Without question, AMD has a superior product roadmap. It's hard to predict how AMD shares will react tomorrow in what has been a sell the news tape, but one thing for certain is that earnings estimates will be raised overnight.

AMD outlook:

For the full year 2021, AMD now expects revenue growth of approximately 60% compared to 2020. This will result in a projected revenue of $15,620.8 in 2021. Gross profit will be approximately 48% (estimated to be $7,497) in 2021. EBIT will be about $3592.78. Net income is about $2,968. AMD plans to buy back $4 billion of shares, that will cut back outstanding shares to 1,220. Divided Net Income by outstanding shares will lead to the EPS of 2.43. We will get the stock price for AMD which is $95 using current multiple of 35.21.

Target price: $95/share