Advanced Micro Devices (AMD -1.07%) reported strong quarterly results on Tuesday, May 3, which sent the stock rocketing after hours. This quarter was also the first to include results from AMD's acquisition of Xilinx, which closed on Feb. 14.
With the price spike, investors might be wondering if purchasing the stock now is a prudent investment decision. The earnings report revealed several vital items investors must understand before taking a position in this chipmaker.
Image source: Getty Images.
An impressive quarter amid a challenging environment
AMD makes several computer components, including processors, graphics processing units (GPUs), and accelerators for data centers. With a slowdown in PC component sales expected during the quarter, the primary business had to navigate demanding expectations. It also completed the Xilinx acquisition during the quarter, further adding to the workload the company had to accomplish during the first quarter.
Its acquisition of Xilinx allowed AMD to expand further into the semiconductor space with field-programmable gate arrays (FPGAs). Despite the challenging backdrop and time consumption of the acquisition, AMD still managed to post a strong quarter.
AMD's quarterly results should be assessed from two perspectives: with and without the addition of Xilinx. Any time a company makes an acquisition, it instantly recognizes a vast revenue boost as the acquired company's sales are lumped into the quarterly results. This accounting skews results as AMD grew its overall quarterly revenue 71% year over year to $5.9 billion. However, when Xilinx's contribution is subtracted, AMD's sales growth was still an impressive 55%.
AMD exceeded its revenue guidance by $228 million (a 4.5% beat) and raised its full-year sales outlook to $26.3 billion, up from the $21.5 billion it established at the beginning of the year. The Xilinx acquisition is the primary driver of this increased guidance, but management didn't break out how much it would contribute. Using Xilinx's last three publicly available quarters (as Xilinx was partially included in this quarter), it had about $2.8 billion in sales. If it continues growing at its last reported year-over-year pace of 26%, Xilinx will contribute around $4.1 billion this year. Subtracting this value from AMD's revenue guidance gives the original AMD business a full-year outlook of $22.2 billion. This extra $700 million is a sizable raise from the previously guided value.
AMD also raised its gross margin outlook from 51% to 54%, showing its pricing power. AMD is navigating an inflationary environment well, whether it is resisting price increases from suppliers or passing hikes onto the consumer.
Image source: AMD.
Moving to the bottom line, its non-GAAP (adjusted) net income rose 110%, excluding the Xilinx addition. Non-GAAP metrics are also essential to use, as acquisition costs can skew metrics using generally accepted accounting principles (GAAP) in quarters when acquisitions close. This rise was driven by a substantially higher operating margin, which means AMD is becoming a more efficient business. Investors should be thrilled when a business can improve its operating margin from 22% to 30% (excluding the Xilinx addition).
Overall, AMD blew away internal expectations and raised full-year guidance. Investors couldn't ask for much better from management.
Is the stock a buy?
From a valuation standpoint, AMD has returned to a typical price-to-earnings (P/E) ratio for the company.
AMD PE Ratio data by YCharts
However, it trades far below the valuation of one of its competitors, Nvidia (with a P/E of 51), and above another, Intel (7.5). Nevertheless, this valuation is probably a fair price for AMD with a strong outlook. AMD's server demand isn't slowing down and Xilinx will continue to provide the company with a solid sales boost.
AMD is a reliable company that just reported great earnings. Investors should have no problem purchasing the stock, regardless of its recent spike.
