AMD Crushed It, Lisa Su Crushed It: Here’s How to Trade It

Crushed it! Okay, maybe I’m a little biased. Maybe I’m long Advanced Micro Devices (AMD) . Maybe Lisa Su was already my favorite all-time CEO. Maybe, just maybe, when Advanced Micro Devices released the firm’s first quarter financial results on Tuesday night, the firm simply ripped the cover off of the ball. Maybe.

For the three month period ending March 26th, 2022, Advanced Micro Devices posted adjusted EPS of $1.13 (GAAP EPS: $0.56) on revenue of $5.9B. Both of these top and bottom line results easily beat Wall Street. That’s earnings growth of 117% on sales growth of 71.2% for those keeping score.

Looking at the numbers within the numbers… adjusted gross margin improved (an eye-popping 660 bps) from 46% a year ago to 53%. Adjusted operating income grew 141% despite 62% growth in adjusted operating expenses. That results in adjusted operating margin that grew nine whole percentage points to 31%. Excluding Xilinx, adjusted revenue increased 55%, adjusted gross margin increased from 46% to 51%, while adjusted operating income grew 110% and adjusted operating margin increased to 30%. The corporate execution has been superb. The numbers are stunning.

Segment Performance

Computing and Graphics

… includes desktop and notebook processors and chipsets, discrete and integrated GPUs, data center and professional GPUs and development services

Revenue increased 33% y/y, and 8% sequentially to $2.8B (a new record) driven by Ryzen and Radeon processor sales year over year and Ryzen processor sales quarter over quarter.

– Record operating income of $723M up from $485M for the year ago period.

– Average selling prices increased both y/y and q/q driven by a richer mix of Ryzen processor sales.

Enterprise, Embedded and Semi-Custom

… includes server and embedded processors, semi-custom, System-on-Chip (SoC) products, development services and technology for game consoles

Revenue increased 88% y/y and 13% sequentially to $2.5B (a new record) driven by EPYC processor sales as well as sales across both the semi-custom and embedded product spaces.

– Record operating income of $881M up from $277M for the year ago period.

– Operating income improved due to higher revenue and an $83M licensing gain.

Xilinx

… includes Field programmable Gate Arrays (FPGA), adaptive System-on-Chips (SoC), and Adaptive Computer Acceleration Platform (ACAP) products…..

Partial quarter revenue was $559M with an operating income of $233M. On a pro-forma basis for the full quarter, Xilinx generated over $1B of revenue (+22%) driven by growth across all major end market categories. (This deal closed in mid-February.)

On That Note…

On the call last night, CEO Lisa Su said that the Xilinx deal as well as the planned Pensando acquisition have brought AMD to a “significant inflection point” in the firm’s transformation. Su added, “The strategic importance of the Xilinx acquisition to our long-term goals cannot be overstated. As the industry’s number one provider of FPGA and adaptive computing solutions. Xilinx significantly expands our technology and product portfolio.”

Outlook

For the current quarter, AMD expects to see revenue of roughly $6.5B, which would be good for year over year growth of 69% and sequential growth of 10%. This is also above Wall Street consensus of about $6.4B. The firm also expects Q2 adjusted gross margin to print close to 54%, which is well above the 51% or so that Wall Street was looking for.

For the full year 2022, AMD expects revenue to land in the area of $26.3B. If realized, that would be good for year over year growth of 60%, and crushed prior guidance for growth of 31%. This also beats the consensus view for $25.2B. Here also, the firm now expects gross margin to end up around 54%, up from prior guidance of 51%.

Just an aside… AMD repurchased $1.9B in common stock during the first quarter, leaving $8.3B in the current (and recently beefed up) authorization.

Wall Street

I can find nine sell-side analysts that are both rated at five stars by TipRanks and have opined on Advanced Micro Devices since these earnings were released last night. There are seven “buy” or buy equivalent ratings and two “hold” or hold equivalent ratings. That’s how these nine went into Tuesday night. There has been some movement on target prices in both directions.

The average target price for these nine analysts is $141.67 with a high of $200 (Hans Mosesmann of Rosenblatt) and a low of $98 (Harsh Kumar of Piper Sandler). The average of the seven “buys” is $152.43, while the two “holds” average $104.

My Thoughts

AMD crushed it. Again. Lisa Su crushed it again. The environment for chip stocks is undeniably tough. I have been a strong believer in an almost permanent state of demand for everything this industry does. That won’t go away all that quickly. As supplies do catch up to demand and as global economies struggle, I would think that prices for chips of all kinds could be suspect moving forward. As inflation slows (if it slows), chips and tech in general will not be exempt.

That said, AMD, along with Nvidia (NVDA) is the cream of the crop in creating the cutting edge across so many burgeoning industries. NVDA still trades at 35 times forward looking earnings, AMD at a far more reasonable 22 times. Yes, I at first added to and then reduced exposure to AMD on the way down. That was risk management. I am still a believer, and AMD came into these earnings as the third largest long position on my book.

Readers can see that the last few days have been kind to AMD after the descending triangle stretched out over January through early April unleashed some pressure on the stock. Relative Strength, the Full Stochastics Oscillator and the daily MACD all look better than they did in late April.

Currently, I see the stock’s 50 day SMA ($105) as pivot. This would allow, if taken for a target price of $126 conservatively… I could see $132. Add? Between $90 and $85. Panic? Probably not. A new 2022 low would force a reduction in exposure.

(AMD and NVDA are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)