Advanced Micro Devices (AMD) reported a fantastic first-quarter earnings after the closing bell Tuesday. Adjusted earnings per share skyrocketed 117% year-over-year and 23% over the previous quarter to $1.13, well above analyst expectations of $0.92 per share. Providing for that bottom line beat was superb margin performance as first-quarter adjusted gross margins expanded an incredible 660 basis points versus the year ago period, and 240 basis points sequentially to about 53%, nicely ahead of the 50.5% expected by analysts. Revenue surged 71% year over year and 22% over last quarter to $5.89 billion (including contributions from the recently acquired Xylinx), breezing past the $5 billion consensus estimates. 

Shares of AMD were up as much as 8% in after-hours trading.

Breaking down the results

In the computing and graphics segment, revenue increased 33% year over year and 8% over last quarter to a record $2.8 billion, topping estimates of $2.65 billion. The annual revenue growth was driven by both Ryzen and Radeon processor sales, while the sequential growth comes largely on the back of higher Ryzen processor sales.

• On the call, management said AMD gained client processor revenue share for the eighth straight quarter. 

• On the commercial side, management said the company is “well-positioned to accelerate growth” on notebooks with launches on track for this year.

• Importantly, management acknowledged the PC market is getting softer, but reminded investors the focus is on the premium gaming and commercial segments of the market, where they see strong growth opportunities.

• Graphics revenue was up double-digit percentages thanks to record desktop graphics sales and a near doubling of GPU sales versus the year ago period. 

In the enterprise, embedded and semi-custom segment, revenue increased 88% year over year and 13% quarter over quarter to a record $2.5 billion, topping estimates of $2.37 billion. Revenue growth was driven by record server, semi-custom and embedded processor sales. 

• On the call, management noted that semi-custom sales “grew by a significant double-digit percentage” versus the year ago period thanks to strong demand for Sony’s PlayStation 5 and Microsoft’s Xbox consoles as well as Valve’s new Steam Deck. Moreover, management commented that this generation of gaming consoles is outpacing all prior generations and that as a result, they expect 2022 to be a record year for the semi-custom business.

• Embedded business revenue more than doubled, with automotive leading the way.

• Servers posted another record quarter with revenue more than doubling versus the year ago period on the back of growing demand for EPIC processors from cloud enterprise, and high performance computing customers. Notably, with this double, server processor revenue has now doubled, on an annual basis, in 8 of the last 10 quarters.

• Cloud revenues also more than doubled annually as the largest providers (Alibaba, Amazon, Baidu Cloud, Microsoft Azure and Google, ...) added 70 new AMD-powered instances. That brings total AMD-based cloud instances available from the largest hyperscalers to over 460, with plans to launch more in coming quarters. Note, an “instance” essentially refers to a virtual machine running workloads in the cloud. Cloud computing customers can select the type of instance they want to use based on the work they are doing. More AMD instances essentially means more demand from cloud computing customers to work on virtual machines that leverage AMD’s chips.

• Enterprise revenue more than doubled annually thanks strong growth in key verticals including IT infrastructure, financial services and database applications.

Guidance

Management raised expectations for the full year, now targeting 2022 sales of $26.3 billion — a roughly 60% annual increase driven by addition of Xilinx and higher server and semi-custom revenue. AMD also forecasted adjusted gross margins of roughly 54%, an increase from the roughly 51% margin previously expected. 

For the second quarter, AMD expects revenues to jump roughly 69% year over and 10% over the first quarter to $6.5 billion, plus or minus $200 million. The year-over-year growth will be driven by the addition of Xilinx as well as higher server, semi-custom and client sales. On margins, AMD expects adjusted gross margins for the second quarter to be about 54%, which is significantly above analyst forecasts of about 50.5% on FactSet.

Xilinx update 

Management highlighted that Xilinx delivered its fourth straight quarter of greater than 20% year-over-year revenue growth and the second straight quarter of greater than $1 billion of revenue. The integration work continues with management noting “tremendous excitement” from customers and adding that in their view, AMD now had “the best portfolio of high-performance and adaptive computing engines in the industry.”

Importantly the team also said they have “also identified significant additional revenue synergy opportunities” with some of AMD’s largest customers and can now address more of their computing needs thanks to the expanded product portfolio with the acquisition.

(Remember, AMD recently acquired Xylinx)

Capital allocation 

During the quarter, AMD announced an $8 billion share repurchase authorization, in addition to the $4 billion buyback authorized last year. During the quarter, management returned $1.9 billion to shareholders through buybacks; management said $8.3 billion remained authorized as of the end of the quarter.

Bottom line 

AMD has become a go-to supplier of cutting edge chips to companies looking to improve their tech infrastructure — something these customers must to do stay competitive. With the acquisition of semiconductor device maker Xilinx now complete, management is identifying additional synergy opportunities from their broader portfolio of products. Consumer demand for next-generation consoles continues to drive strong semi-custom chip demand. And while the personal computer market has softened following multiple quarters of near record unit shipments, AMD’s outsized exposure to the premium gaming and commercial end markets means more growth and further share gains ahead — despite ongoing supply challenges.

With shares down roughly 40% YTD, AMD is a strong buy after this incredible quarter. We contribute the decline in AMD to two factors: i) a "feared" slowdown of semiconductor demands based on recession expectations and ii) multiple compression. On i), market has been pricing in a recession for the US economy comes as early as 2023, and semiconductor stocks have been taking a big hit because normally semiconductor demand is economically-sensitive. However, as we have seen from AMD's results, especially the raise in guidance, there is no slowdown at all. Analysts and the market clearly have bet against CEO Lisa Su, but yesterday night, she showed the world what an incredible CEO she is.

On ii), it is true that before the start of 2022, AMD traded at an expensive multiple compared to the market (40-50x forward earnings). Now though, based on estimated 2022 earnings of $4.00/share (although after today, we would expect analysts to revise up this number), shares are trading at 22.8 times forward earnings. This is ridiculously cheap for two reasons: i) the 5-year average P/E of this stock is 36 times forward earnings and ii) the company is growing ~100% year over year. 

Bottom line, even if shares of AMD open up around 10% this morning, shares are still incredibly cheap compared to its own historical metrics and its future growth potentials. We would be buyers here if we haven't done so last week.