After struggling in the early days of 2022, shares of semiconductor giant Advanced Micro Devices (AMD +1.64%) has recovered much of its losses in the past few days. Investor sentiment for the company has improved dramatically after stellar fourth-quarter earnings results (ended Dec. 31, 2021). Revenues jumped 49% year over year to an all-time quarterly high of $4.8 billion, while net income rose by 76% year over year to $1.1 billion.
AMD has managed to consistently surpass consensus estimates for the past seven quarters, even in times of constrained chip supply. The company has also given very strong guidance for fiscal 2022 -- revenues are expected to grow 31% year over year to $21.5 billion, and non-GAAP (adjusted) gross margin to reach 51%. With AMD investing $1 billion in supply chain capacity expansions and incremental supply expected to come online in 2022, chances of the company meeting its fiscal 2022 guidance remain quite high. Not surprisingly, many Wall Street analysts have reiterated their "buy" ratings and raised the target price for the stock.
Let's drill down on some key reasons AMD is being touted as an attractive investment in 2022.
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Broad-based strength across all business segments
Despite signs of the end of pandemic-driven growth in the U.S. PC market, global PC shipments rose 9.9% year over year to 339.8 million units in 2021. Gartner also does not expect the annual global PC shipment volumes to revert to pre-pandemic levels for at least two to three years.
In Q4 (ended Dec. 31, 2021), AMD saw its computing and graphics segment's revenues jump by 32% year over year to $2.6 billion. The company reported robust demand for its Ryzen 5000 processors in premium notebooks and higher-end desktops, used extensively by the gaming community. The trend is expected to become even stronger as Ryzen 6000 series notebook CPUs gain momentum and AMD gears up for the launch of Ryzen 7000 desktop processors in the second half of 2022.
AMD is making major strides for its GPU business in data centers and gaming. The company reported a more than 100% jump in data center graphics revenues, as its GPUs are being increasingly used in artificial intelligence and high-performance computing workloads. The company has also launched two low-cost GPUs, the Radeon RX 6500 XT graphics card and Radeon RX 6400, for budget gamers.
Along with client processors, AMD is witnessing solid adoption of its server-side EPYC processors from cloud and enterprise customers. The company also plans to launch a next-generation EPYC processor (Genoa) and cloud-optimized Bergamo processor in late 2022. AMD offers semi-custom solutions such as CPU, GPU, video, and audio technology for Microsoft and Sony's gaming consoles, which is turning out to be a major growth driver. Driven by these tailwinds, AMD's enterprise, embedded, and semi-custom segment reported a 75% year-over-year jump in revenues to $2.2 billion in Q4.
Xilinx acquisition strengthens AMD's standing in the HPC segment
On Feb. 10, AMD announced that it had secured all necessary regulatory approvals to go ahead with its acquisition of leading programmable chip player Xilinx (XLNX +0.00%) and expects the deal to close by Feb. 14. This transaction is expected to position the combined company as a force to reckon with in the HPC space, thereby strengthening its position in data centers, gaming, communications, automotive, aerospace, industrial, and defense. With the global HPC market expected to grow from $37.8 billion in 2020 to $49.4 billion in 2025, the Xilinx acquisition can prove to be a major growth catalyst for AMD. The combined company is also expected to realize operational efficiencies of $300 million within 18 months of completing the transaction.
AMD is trading at levels lower than its historical highs
AMD is trading at 7.3 times forward sales and 32.7 times forward earnings following its recent rally. The premium valuation is not surprising, considering this company has demonstrated consistent growth in its top line and bottom line at a solid pace.
AMD PS Ratio (Forward) data by YCharts
Still, there remains scope for further upside in this stock. Even now, AMD's valuation multiples are at the lower range of its historical performance in the past year. Considering the secular tailwinds, robust operational model, and a very attractive future product roadmap, AMD seems to be a smart pick for February 2022.
