Advanced Micro Devices (AMD 3.05%) had a forgetful start to the year as shares of the chipmaker plunged close to 21% last month, but it hasn't taken long for the company to regain its mojo on the stock market.
AMD stock has recovered a lot of ground over the past few days, aided by a solid fourth-quarter earnings report that handsomely crushed expectations.
AMD data by YCharts.
It wasn't surprising to see AMD cruise past Wall Street's expectations as it was riding on some impressive tailwinds going into its quarterly report. What's more, the company's 2022 guidance indicates that it is on track to deliver another year of solid growth, which has prompted Wall Street analysts to raise their expectations for AMD stock.
For instance, Hans Mosesmann of Rosenblatt Securities has raised his price target on AMD stock to $200 from $180. This points toward a 60% potential upside in AMD stock from its closing price on Feb. 4. Let's look at the reasons why AMD looks capable of clocking such terrific gains in 2022.
AMD's guidance points toward a strong year
AMD finished 2021 with $16.4 billion in revenue, an increase of 68% compared to 2020. The chipmaker recorded an increase of 3.7 percentage points in gross margin to 48% on the back of a favorable product mix. As a result, AMD clocked adjusted earnings of $2.79 per share in 2021, a big increase over the prior year's figure of $1.29 per share.
AMD's guidance indicates it could sustain its terrific performance in 2022. The company expects revenue to increase 45% year over year in the first quarter to $5 billion, driven by strong growth across all its businesses. AMD's full-year guidance calls for revenue growth of 31% in 2022, while non-generally accepted accounting principles (GAAP) gross margin is expected to increase to 51%.
Image source: Getty Images.
However, don't be surprised to see AMD exceed its expectations just like it did last year. It is worth noting that the company was anticipating its 2021 revenue to jump 37% in January 2021, but it blew past those expectations.
A similar trend could unfold in 2022. Let's see why that may be the case.
Meet the growth drivers
AMD's outstanding growth in 2021 was driven by market share gains in the client and server computing markets, the increase in sales of its semi-custom chips used in video gaming consoles, and its growing clout in the data center graphics processing unit (GPU) market.
For instance, in the computing and graphics segment, AMD's quarterly revenue increased 32% year over year to $2.6 billion on the back of solid demand for Ryzen processors and Radeon GPUs. AMD CEO Lisa Su pointed out on the Q4 2021 earnings conference call that the company has gained client processor revenue share for seven straight quarters.
As Su's comments on the conference call indicate, the chipmaker is in no mood to lose that momentum. Referring to AMD's latest Ryzen 6000 series notebook processors, Su said they would power more than 200 laptop models this year.
That's a nice jump over last year when AMD's Ryzen 5000 notebook processors were estimated to power 150 laptop designs. Additionally, AMD is about to refresh its desktop CPU lineup with the Ryzen 7000 series processors that are expected to hit the market in the second half of 2022. Su claims these new processors are likely to provide a "significant performance increase" over the current generation of processors.
Coming to graphics cards, AMD's data center GPU revenue more than doubled year over year thanks to design wins for high-performance computing (HPC) customers. Management says more supercomputers are using its data center GPUs, while OEMs (original equipment manufacturers) -- such as Atos, Dell, HP, Lenovo, and Supermicro -- are launching more products based on their offerings.
With demand for data center GPUs expected to increase at a compound annual growth rate of 42% through 2027, as per a third-party estimate, AMD investors can expect this business to get stronger.
Meanwhile, AMD will also update its server processor lineup this year. The company has already started sampling its next-generation EPYC processors with customers and expects to launch them later this year.
An updated product lineup means AMD could gain more market share against Intel in 2022. Bank of America estimates that AMD's share of the $70 billion CPU market is still at 15%, leaving a lot of room for the chipmaker to grow its revenue. In the server market, specifically, the investment bank sees AMD's share jumping to more than 35% in the long run compared to this year's estimate of 13%.
Throw in the strong demand for gaming consoles from Microsoft and Sony that are powered by AMD's semi-custom chips, it is easy to see why the chipmaker's enterprise, embedded, and semi-custom (EESC) segment is set up for another solid year. In Q4, this segment's revenue was up 75% year over year to $2.2 billion, and investors can expect AMD to sustain this terrific momentum due to the reasons discussed above.
Why the stock is still worth buying
AMD stock is trading at 46 times trailing earnings following its recent rally. This is a rich multiple, considering the S&P 500 sports an earnings multiple of 26. However, AMD's forward earnings multiple of 29 points toward significant bottom-line growth this year.
It is also worth noting that AMD's multiples are lower than its five-year trailing earnings multiple of 110 and forward earnings multiple of 60, indicating that the stock is relatively cheaper on a historical basis. All this makes AMD a top growth stock to buy because it can deliver significant upside this year and in the long run, considering its earnings are expected to grow at an annual pace of 34% for the next five years.
