65 Billion Reasons to Buy AMD Stock

This massive market could supercharge AMD's long-term growth.

Advanced Micro Devices (AMD 2.74%) crushed Wall Street's expectations on May 3 with a solid set of first-quarter 2022 results, driven mainly by the terrific growth of the data center business and its acquisition of chipmaker Xilinx, which was completed in February this year.

AMD reported Q1 revenue of $5.9 billion, a jump of 71% over the prior-year period. The chipmaker's adjusted earnings shot up 117% year over year to $1.13 per share thanks to a nice bump of 660 basis points in the company's non-GAAP gross margin to $1.13 per share. AMD's adjusted operating margin was also up nine percentage points over the prior-year period to 31% last quarter.

Analysts were expecting AMD to earn $0.92 per share on $5.3 billion in revenue, but the robust demand for data center chips helped it easily hammer those forecasts despite the headwinds it was facing going into its quarterly report. Let's take a closer look at how the data center business gave AMD a shot in the arm last quarter, and see how it could play a critical role in the company's growth in the long run.

The company's revenue from the enterprise, embedded, and semi-custom (EESC) segment, which includes sales of server processors, shot up 88% year over year in the first quarter to $2.5 billion. AMD credited this terrific growth to an increase in sales of its EPYC server processors. AMD CEO Lisa Su said on the company's latest earnings conference call that AMD has “more than doubled server processor revenue year over year in eight of the last 10 quarters.”

Cloud service providers such as Amazon, Alibaba, Baidu, Microsoft, Alphabet's Google, and others have increased their adoption of AMD's server chips to power their cloud deployments. As a result, 70 new virtual servers were launched using AMD's chips last quarter, and management points out that more servers are on the way.

This indicates that AMD could continue gaining market share against Intel in the server processor market. Mercury Research points out that AMD exited 2022 with a 10.7% share of the server market, up 3.6 percentage points over the fourth quarter of 2020. So AMD has a lot of room to grow its server market share, and investment banking firm Keybanc estimates that it could end 2022 with 20% of this space.

Meanwhile, AMD's acquisition of Xilinx could also pay off big time in the long run, as FPGAs are expected to play a key role in accelerating server workloads. Xilinx is a leading provider of FPGAs, and has dominated this market over the years despite the presence of big rivals such as Intel.

AMD's data center business is at the start of a massive growth curve

According to a third-party estimate, the global data center accelerator market could clock a compound annual growth rate (CAGR) of 36.7% through 2026, exceeding $65 billion in revenue at the end of the forecast period compared to last year's revenue of $13.7 billion. This massive growth isn't surprising. The huge growth in data volume has led to an increase in the demand for the various types of chips that are capable of accelerating workloads.

Accelerators such as CPUs (central processing units), GPUs (graphics processing units), and FPGAs (field-programmable gate arrays) are being increasingly deployed in data centers thanks to their ability to tackle artificial intelligence (AI) and deep learning workloads. AMD is making the most of this growth already since it supplies all three types of data center accelerators.

AMD pointed out in its quarterly press release that Xilinx generated $1 billion in revenue for the first quarter on a pro forma basis, an increase of 22% over the prior year. Even better, the Xilinx acquisition positively impacted AMD's margin thanks to the high-margin nature of the former's offerings.

The FPGA market reportedly generated $6 billion in revenue in 2021. By 2028, FPGA revenue is expected to exceed $14 billion, and AMD's acquisition of Xilinx puts it in a solid position to make the most of this end-market opportunity.

Another terrific year is in the cards

AMD's data center revenue had doubled last quarter on a year-over-year basis and produced a “low 20s percentage of our overall revenue,” according to Su. Given the huge revenue opportunity that AMD can attack in the data center space, it wouldn't be surprising to see this market move the needle in a bigger way for the chipmaker and accelerate its growth.

This explains the massive bump in AMD's annual guidance. The company now anticipates revenue to increase 60% in 2022 to $26.3 billion, up from its prior forecast of 31% growth. AMD credits the updated guidance to the Xilinx acquisition, an increase in server processor revenue, as well as a bump in sales of the semi-custom chips that are used in video gaming consoles.

The company has also increased its non-GAAP gross margin forecast for 2022 to 54% from the prior guidance of 51%. This should lead to robust bottom-line growth, a trend that's expected to continue in the long run as analysts expect AMD's earnings to increase at a 33% CAGR for the next five years.

With the stock trading at 35 times trailing earnings as compared to its five-year average earnings multiple of 107, investors may regret not buying this semiconductor stock right now, as it could go on a bull run thanks to the data center market.