Why Advanced Micro Devices Rose 19.1% in May
What happened
Shares of Advanced Micro Devices (NASDAQ: AMD) surged 19.1% higher in May, according to data from S&P Global Market Intelligence.
The 19.1% gain came after a 21.8% decline in April. Still, there is a case to be made for more upside, since May's rally was powered by strong earnings that defied the skepticism voiced by some analysts during the prior month.
So what
In the first quarter, which was reported in early May, AMD's revenue surged 71% to $5.89 billion, with non-GAAP (adjusted) earnings per share of $1.13, up 117%. Both figures handily beat analyst estimates. AMD management gave strong guidance as well, with the recent acquisition of Xilinx boosting numbers.
There was a fair amount of consternation around the health of the consumer going into the quarter, but AMD's computing and graphics segment, which is focused on PCs, still grew 33% year over year. Of course, that segment was overshadowed by its enterprise, embedded, and semi-custom division, which notably makes the Epyc server processors. That segment was up 88%, powered by Epyc chip sales, which more than doubled.
Traditionally the smaller of the two segments, AMD's enterprise segment reached $2.5 billion in revenue, closing in on the client and graphics segment at $2.8 billion. Given the momentum in the data center segment more broadly across tech, it would not be surprising to see the enterprise segment overtake the client and graphics segment at some point soon.
Also helping matters was $559 million in revenue from Xilinx, which was acquired during the quarter. Had Xilinx been around for the entire quarter, it would have made more than $1 billion in revenue, or about 16% of the company's new total going forward.
On the conference call with analysts, CEO Lisa Su did point to some "softness" in parts of the PC market, but also noted AMD is gaining market share while focusing on the high end of the market, which remains strong. So, its PC chip-related sales shouldn't suffer that much. Additionally, she emphasized not all parts of the market were soft, as the data center appears to be booming with no letup in sight.
Excluding the contribution from Xilinx, management still guided for a mid-30% organic growth rate in the core chip business for the full year, up from a 31% guide in the prior quarter. The change was primarily due to increased demand for server chips.
Image source: Getty Images.
Now what
After a big valuation reset in the first half of the year, AMD has come bouncing back with many other tech stocks. AMD's stock is now back up to trading around 40 times trailing earnings and less than 25 times this year's earnings estimates. That's not unreasonable for a company growing at a mid-30% organic growth rate, and AMD shares are still down about 33% from all-time highs set last November. Shares may have very well been ahead of themselves then, but not much has changed with the business, which remains strong.
While things could change if there is a bad recession, AMD's stock price is now much more reasonable, even after the May surge.
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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Intel. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.
