Advanced Micro Devices Inc. (AMD, Financial) saw its stock reach new highs in mid-November last year following strong earnings results, new product reveals and a promising data center partnership with Meta Platforms Inc. (FB, Financial).
However, it soon began falling due to a wave of analyst downgrades as Wall Street became concerned about a slowdown in the PC market in 2022. Many other semiconductor stocks suffered a similar fate; with supply chain issues and the demand pull-forward at the beginning of the pandemic, it seemed like the bull run might be coming to an end for this sector.
Advanced Micro Devices is determined to prove doubters wrong, though. Even as several peers have been issuing weaker-than-expected outlooks for 2022, this company showed its strength again on Tuesday with an earnings beat and strong guidance.
The stock gained 5% following the news. At $122.62 per share, it is trading well below its median historical valuation ratios, and according to the GF Value Line, it is fairly valued. Does this mean Advanced Micro Devices is undervalued, or does it have further left to fall?
A strong finish to 2021
For the fourth quarter of 2021, Advanced Micro Devices grew its revenue by 49% to $4.8 billion versus the $4.5 billion analysts had been expecting. Earnings per share were 80 cents on a GAAP basis and 92 cents on a non-GAAP basis, with non-GAAP earnings beating the 75 cents that analysts had predicted. GAAP earnings were down 45% year over year, while non-GAAP earnings increased 77% (non-GAAP adjustments include a normalized tax rate and the exclusion of certain pre-tax adjustments).
Full-year 2021 saw revenue grow 68% to $16.4 billion. Earnings per share were $2.57 on a GAAP basis and $2.79 on a non-GAAP basis, gaining 25% and 117%, respectively, compared to 2020. President and CEO Dr. Lisa Su had the following to say:
“2021 was an outstanding year for AMD with record annual revenue and profitability. Each of our businesses performed extremely well, with data center revenue doubling year-over-year driven by growing adoption of AMD EPYC processors across cloud and enterprise customers. We expect another year of significant growth in 2022 as we ramp our current portfolio and launch our next generation of PC, gaming and data center products.”
The Enterprise, Embedded and Semi-Custom segment led growth with revenue up 75% year over year. This part of the business includes server and embedded processors, semi-custom system-on-chip (SoC) products, development services and technology for game consoles.
The Computing and Graphics segment, which primarily consists of processors, chipsets, GPUs and data centers, grew 32%, driven by strong sales of Ryzen and Radeon processors.
Looking forward
Advanced Micro Devices issued stronger guidance that Wall Street was expecting for 2022, which is a large part of what caused shares to jump on Wednesday.
For the first quarter of 2022, the company expects revenue to grow approximately 45% year over year to $5.0 billion, achieving a non-GAAP gross margin of 50.5%. For full-year 2022, the company aims for revenue of approximately $21.5 billion, an increase of 31% over 2021.
In order to mitigate supply chain issues, Advanced Micro Devices is making strategic investments in long-term supply chain capacity, and it has a strong foundry partnership with Taiwan Semiconductor Manufacturing (TSM, Financial), the world’s leading chip producer. Back in July of 2021, Su said she expected the company’s chip supply to be tight through the second half of the year, but that these issues should ease up by 2022.
The bigger concern is PCs. When PC growth exploded in 2020 and 2021, there was a lot of pull-forward in demand, and Advanced Micro Devices was able to take advantage of this to gain market share. However, this market will likely begin to slow down in 2022.
Advanced Micro Devices remains on track to deliver next-generation products in 2022, including the Zen 4 processors and RDNA 3 GPUs. It has also made progress with its Xilinx (XLNX, Financial) acquisition deal, which recently gained approval from China’s State Administration for Market Regulation and is scheduled to close in the first quarter of this year.
Signs to watch
Despite supply chain headwinds and a slowdown in growth for the PC business, Advanced Micro Devices grew at a breakneck pace in 2021, and it is aiming for more of the same in 2022. For a stock with a 45% top-line growth target, the current price-earnings ratio of 37 doesn’t seem expensive.
Based on historical earnings multiples, past returns and analysts’ estimates of future business performance, the GF Value chart rates the stock as fairly valued, putting it firmly in the “great company at a fair price” bucket.
However, investors should still be wary of bullish sentiment in the broader semiconductor sector, as well as the market’s tendency to punish high-growth companies for not growing as quickly as they were anticipating.
One thing to keep an eye on is how well the company sticks to its deadlines. Intel (INTC, Financial) has understandably taken flak for failure to release new chips in a timely manner, which has contributed to its share price decline. If Advanced Micro Devices can stick to the deadlines it sets, not only will this be essential for sales, but it could also drive investor optimism and thus better earnings multiples.
Another key factor that could affect the stock price going forward is the margin situation. Advanced Micro Devices has been investing heavily to develop top products, increase its market share and secure supply chains, and while these efforts have paid off, gross margins are still lagging Intel and Nvidia (NVDA, Financial).
Higher gross margins aren’t always better. Companies need to balance creating good products with controlling costs. Investing too little in goods can disappoint customers and result in lower growth or even lost market share. However, the market might interpret lower margins as a sign that inflation or supply chain constraints will affect growth.
Overall, shares of Advanced Micro Devices have fallen back into value territory, providing an opportunity for long-term investors interested in the stock. Short-term headwinds abound, though, and it’s important to keep an eye on things like deadlines, margins and the macro environment.
