AMD Stock Is a Screaming Buy After Its Latest Earnings Report - Motley Fool

Advanced Micro Devices (NASDAQ:AMD) went into its third-quarter earnings report with a bunch of catalysts in the personal computing, video gaming, and data center segments. All these verticals reported rapid growth to help the company crush Wall Street expectations and deliver eye-popping results.

What's more, AMD raised its full-year guidance, on the back of robust demand for its chips. Let's look at this tech giant's latest numbers and see why it remains a top growth stock to buy, even after 39% gains so far in 2021.

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AMD delivers outstanding growth, yet again

AMD's third-quarter revenue shot up 54% year over year to $4.3 billion, buoyed by strong sales in both computing and graphics and the enterprise, embedded, and semi-custom segments. Even better, the company's non-GAAP gross margin jumped 440 basis points year over year to 48%, thanks to an improved product mix across its key product lines: EPYC server processors, Ryzen client processors, and Radeon graphics processors.

This combination of a sharp increase in the revenue and a nice bump in the margins led to 78% year-over-year growth in AMD's adjusted earnings to $0.73 per share. The company now anticipates a 65% jump in 2021 revenue, thanks to growth across all its businesses.

It's worth noting that AMD had originally called for 37% revenue growth in 2021 in January this year. It has increased its guidance each quarter, due to the growing demand for chips used in various devices. Don't be surprised to see AMD end the year with stronger-than-expected results, especially considering the lucrative growth drivers it's sitting on.

What's driving the growth

AMD gets its revenue from two segments, as discussed earlier. The computing and graphics segment sells Ryzen processors that are used in desktops, notebooks, and workstations, as well as graphics cards that are used by both gamers and data centers. This business was in fine form last quarter and recorded 44% year-over-year revenue growth to $2.4 billion, accounting for 56% of AMD's total revenue.

The chipmaker saw an increase in the average selling price of its Ryzen processors and graphics cards, as customers bought more high-end products. There were quite a few solid takeaways from this segment, as AMD saw an increase in the adoption of its Ryzen 5000 mobile processors by notebook OEMs (original equipment manufacturers). At the same time, the commercial deployment of notebooks based on Ryzen processors increased significantly during the quarter across public-sector organizations and Fortune 1000 companies.

Meanwhile, the launch of Ryzen 5000 desktop processors with integrated AMD graphics also met with a solid response from the market. AMD says that it has now gained market share in the client-processor market for six quarters in a row.

Mercury Research estimates that AMD held 20% of the notebook CPU market at the end of the second quarter, while its share of the desktop CPU market stood at 17.1%. Intel controlled the rest of the market but has been steadily losing ground to AMD in these markets because of the latter's technological advantage. AMD has room to gain more market share from Intel in the processor space, and doing so could substantially increase the chipmaker's computing and graphics revenue in the long run.

The company is also stepping on the gas in the data center graphics-card market, where its revenue more than doubled over the prior year, thanks to the growing adoption of its GPUs (graphics processing units) in supercomputers. AMD's data center GPU revenue has doubled for two straight quarters now, which bodes well for the long run. This market is expected to hit $26 billion in revenue by 2026.

AMD didn't explicitly state how much revenue it generated from data center GPUs last quarter, but this is still a small business for the company, as it's yet to hit $500 million in annual revenue from this product line. But given the pace at which its data center GPU revenue has increased and the new design wins that the company has scored in this segment, the company seems on track to make a big dent in this market.

Then there's the enterprise, embedded, and semi-custom (EESC) segment, which accounted for the rest of AMD's revenue last quarter. The company registered a 69% year-over-year increase in sales in this segment to $1.9 billion. The strong demand for gaming consoles from Sony and Microsoft, which use AMD's semi-custom processors, was a key catalyst for this segment. More importantly, AMD's semi-custom revenue seems set for long-term growth as the demand for the PlayStation 5 and the latest Xbox consoles is expected to grow at a nice pace in the coming years.

Finally, the server-processor market turned out to be a happy hunting ground for AMD, as the company registered its sixth-straight quarter of record server revenue. AMD's server-processor revenue more than doubled year over year, which isn't surprising as it's been taking away significant market share from Intel in this space. In the second quarter, AMD's server-market share was up 3.7 percentage points year over year to 9.5%.

With AMD's EPYC server processors being selected by more supercomputers and cloud-service providers, the chipmaker's server-market share could head further north. With AMD anticipating that the server-processor market could hit $19 billion in revenue by 2023, a higher market share could boost its revenue big time.

Consider buying before it's too late

AMD stock is trading at 37 times trailing earnings. While that's higher than the S&P 500's earnings multiple of 30, the stock's valuation is still attractive, considering that it was trading at nearly 124 times earnings last year. What's more, AMD's top line had jumped 45% in 2020, so the company is on track to finish 2021 on a much stronger note.

As such, it isn't too late for investors looking to get into a growth stock to buy AMD. The chipmaker can deliver more upside, thanks to a wide range of growth drivers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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