Advanced Micro Devices (AMD -5.80%) is looking strong after reporting its fifth straight quarter of 50%-plus growth in Q3. Momentum was once again broad across the business, with notable strength in data centers and gaming.
While the stock is trading at a lofty price-to-earnings ratio of 46 based on 2021 earnings estimates, the stock still surged to new highs following earnings last week, which might indicate that the shares still have legs. The long-term opportunity in serving the growing need for data centers is certainly on investors' radar, but gaming remains a top near-term catalyst that investors shouldn't overlook.
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AMD Ryzen CPUs are outperforming Intel
AMD reports sales of its Instinct data center graphics processing units (GPUs) and consumer central processing units (CPUs) in the computing and graphics segment, which grew 44% year over year and 7% sequentially to $2.4 billion last quarter.
The Ryzen 5000 series CPUs continue to dominate the consumer side of the market. Ryzen chips are based on AMD's Zen 3 chip architecture and score higher benchmark scores compared to Intel's (INTC -1.93%) high-end Rocket Lake and Comet Lake chips. A recent review by Tom's Hardware noted that the Ryzen 5000 series beat Intel "in every metric that matters," such as running games, power consumption, and application-specific performance.
Intel is looking to counter AMD with its upcoming Alder Lake chips, but Chipzilla might be stuck playing catch-up. After all, Intel's previous Rocket Lake chips didn't stop AMD's growth. While Alder Lake may temporarily narrow the gap, AMD could come out on top again with its Ryzen 6000 CPUs next year. The 6000 series will feature the new 3D V-Cache, which is expected to boost data retrieval speeds and deliver another leap in gaming performance.
The way things are going now, AMD's recent market share gains against Intel in the x86 CPU market are showing signs of sticking, which is good news for investors.
As for GPUs, revenue more than doubled year over year, which management attributed to higher shipments for CDNA 2 data center chips and strong demand for the Radeon 6000 series designed for gaming.
Some investors may have been a bit concerned in recent months that both AMD and Nvidia's (NVDA -8.84%) surging growth in gaming GPUs might have been inflated by higher sales going to cryptocurrency miners. Given the unpredictable nature of crypto mining demand, both companies would like to keep their consumer GPUs going to their intended use cases, which is gaming. On that note, AMD CEO Lisa Su eased those concerns during the Q3 earnings call by stating that demand from the crypto-mining community was "negligible" during the quarter.
Consoles and cloud gaming opportunities
There are still big opportunities over the next few years to sell more chips in the console and cloud gaming markets.
We're just one year into the launch of Sony's PlayStation 5 and Microsoft's Xbox Series X/S, so AMD still has some room to grow its semi-custom business. AMD reported a 69% year-over-year increase in revenue to reach $1.9 billion in the enterprise, embedded, and semi-custom segment, which includes sales of the custom processors used in the new consoles. Console sales usually don't peak until the fourth year after launch, so AMD should continue to see healthy demand here.
Moreover, Nvidia just unveiled its new GeForce NOW RTX 3080 membership, which is powered by AMD Threadripper PRO CPUs. The success of GeForce NOW is another catalyst for AMD's gaming business.
Overall, management expects growth across the business in the fourth quarter. Guidance calls for revenue growth of 39% year over year. Given the momentum in gaming, on top of the secular demand trends in data centers, AMD looks like a growth tech stock that could still deliver robust returns for investors -- even at a P/E of 46.
