What happened
Shares of Advanced Micro Devices (AMD +1.33%) rose 13.1% in July, according to data from S&P Global Market Intelligence. AMD, an ascendant force in both semiconductor CPUs and GPUs, had actually drifted lower for most of the month, as the technology sector experienced some headwinds ahead of earnings; however, the stock skyrocketed in July's final days following a strong July 27 earnings report, along with a raised guidance for the rest of the year.
Images source: Getty Images.
So what
In the second quarter, AMD's sales surged 99%, with adjusted (non-GAAP) earnings per share of $0.63, up 250% -- both figures were well above analyst estimates. The company also raised guidance to 60% growth for 2021, up from initial guidance of 50%. Of particular note, the company's EESC (enterprise, embedded, and semi-custom) segment was up 183%, driven by the success of its EPYC data center chips.
AMD previously had extremely low data center market share, but since the company's third-party foundry Taiwan Semiconductor Manufacturing surpassed main competitor Intel in producing leading-edge chips, AMD has been picking up momentum in this huge and growing market. Not only that, AMD's data center chips seem to have higher margins than AMD's other products. "As data center becomes a higher percentage of our business, that's a favorable mix for us," said CEO Lisa Su on the conference call with analysts.
Oh, and new customer wins in Tesla infotainment systems and Google cloud data centers didn't hurt, either.
Now what
AMD is outgrowing the industry; as it takes market share, reaches greater scale, and the data center becomes a larger part of the business, management sees further growth in margins, targeting gross margins above 50% in the long run, up from 48% last quarter. Su also said the company sees tight supply and strong growth into 2022.
Although AMDs stock looks expensive at around 45 times next year's earnings, it has always looked expensive over the last few years, even as the stock has gone on to market-beating gains. That's a testament to Lisa Su's leadership and the company's stellar execution -- a feature I don't see changing anytime soon.
