Advanced Micro Devices (AMD) boosted its long-term forecasts for a number of important financial metrics Thursday at its analyst day, which was generally well-received by Wall Street.

Here’s a breakdown of what AMD announced, what analysts said afterward and what we think.

AMD’s new targets

A lot has happened since the semiconductor company held its last analyst day on March 5, 2020. AMD gained share in key markets like PCs and completed its blockbuster acquisition of Xilinx, Pensando, moves that help fuel its data-center growth. The fact that AMD updated its long-term financial model wasn’t a surprise, but there’s still a lot to like in what the chip designer now projects over the next three to four years. Here are the new projections (targets from 2020 are in parenthesis):

• Revenue growth: approx. 20% compound annual growth rate (20% CAGR)

• Gross margin: 57% or more (50% or more)

• Operating expenses: approx. 23% to 24% of revenue (approx. 26% to 27%)

• Operating margin: approx. mid-30s% (mid-20s%)

• Free cash flow margin: 25% or more (15% or more)

Projections on four of the five metrics saw meaningful improvement, while the only one that stayed the same is a compound annual growth rate of roughly 20% for revenue. That’s still impressive to us because it’s being projected off a much larger base.

It’s based off pro forma 2021 revenue for AMD and Xilinx combined, which was $20.11 billion for the year ended Dec. 25, 2021. For comparison, when AMD issued its 20% CAGR projection two years ago, the company’s full-year revenue in 2019 was only $6.73 billion.

AMD also updated what it considers its total addressable market. The company now sees a TAM of roughly $300 billion through 2025, due in large part to the acquisitions of Xilinx and Pensando, which bolster AMD’s presence in expanding data center chip market.

In addition to a few product updates (more on that later), AMD left its fiscal 2022 outlook unchanged. It’s still calling for revenues of $26.3 billion, gross margins of 54% and operating expenses of roughly 24%.

What analysts think

Broadly speaking, the analyst community seemed to like what it heard from AMD on Thursday in that there were no unexpected negative changes in outlook.

This is how Christopher Rolland at Susquehanna Financial Group summed up his reaction:

“If properly executed, we note the new model could drive nearly ~$7 of EPS in 2025, with more than half of revenue expected to come from data center and embedded end markets. In short, there were no major surprises, but we deem the day as generally constructive. Reiterate Positive and $140 (~34x 2022E EV/NOPAT) price target.”

Bernstein’s Stacy Rasgon struck a very favorable tone in his reaction note to clients: "The transformation AMD has made under CEO Lisa Su are undeniable. [...] This is not the AMD of yesteryear.”

“Their product roadmaps look competitive and compelling relative to Intel’s latest efforts (with AMD 3/4nm Zen 5 parts arriving to meet Intel’s Granite Rapids in 2024). And the long-term model they presented (~20% growth from 2021-2025, implying a ~$8-$9 EPS in the out year) suggests longer-term Street numbers still have plenty of room to be revised higher.”

In his note to clients, Citigroup’s Christopher Danely maintained his neutral rating on AMD shares and lowered his 2022 sales and earnings estimates. The analyst now expects revenue of $25.4 billion, down from $26.9 billion, and EPS of $3.46 instead of $3.64. The reason for both decisions, he wrote, is a slowdown in PC sales after a Covid-fueled surge in 2020 and 2021. Danely, who has a $110 price target on AMD shares, acknowledged the company “has demonstrated outstanding executional abilities in delivering its financial targets.” However, he said he agrees with some parts of AMD’s long-term projects and cast doubt on others.

“We believe AMD’s long-term margin targets are realistic driven by continued share gains, but a TAM of half the semi industry is aggressive.”

JPMorgan’s Harlan Sur wrote in a note to clients that AMD’s execution over the past few years has “set the company up to maintain a 2-step lead over its competitors, in our view.” However, the analyst maintained his neutral rating and $140 price target on AMD, saying shares appear to be “nearly fully valued.”

“Although AMD has improved its competitiveness across CPU and GPU products with Ryzen, EPYC, and Radeon platforms and is on track to improve its market share and drive meaningful revenue growth in the near term, we believe long-term share gains are less certain. In addition, AMD will have to invest heavily in operating expense (especially R&D) in order to keep pace with the market leaders.”

Our take

We’ve been fans of AMD since portfolio's inception, because the company’s transformation has been incredibly impressive.

We remain bullish on AMD for the long-term, as its data-center business continues to expand and take share from Intel. Other secular trends like 5G and automotive are opportunities for AMD, too. The company’s decision to focus on the high-performance part of PC market — such as commercial clients and gaming — also is smart.

Despite our big-picture optimism, it’s worth noting that tech stocks like AMD are out of favor on Wall Street right now. Friday’s hotter-than-expected inflation report supports that posture because it suggests the Federal Reserve will likely to remain aggressive in the near term to tamp on inflationary pressures. That means higher interest rates, which typically hurt growth-oriented stocks like AMD. However, if it comes down any further and we’ll be looking at a growth stock with a value-like multiple.