Top semiconductor design company AMD (AMD 0.28%) is continuing its hot streak. The company reported earnings Tuesday after the market closed, and CEO Lisa Su announced revenue of $6.55 billion in the second quarter of 2022, representing year-over-year growth of 70%. The rapid rate of expansion was helped in a big way by the acquisition of fellow chip company Xilinx back in February, but organic growth was impressive too. Data center sales, in particular, were up 83% compared to last year.
As cloud computing steadily increases in importance throughout the economy, data center upgrades are ramping up to keep pace. These basic computing units of the cloud are a top reason to be invested in AMD stock right now. Is it still a buy after the Q2 update?
Led by data centers and other industrial applications
Starting with Q2 2022, AMD is reorganizing its business segments for financial reporting purposes. With the mega-merger with Xilinx now complete, a whole new unit dubbed "embedded segment" was created to account for enterprise end-markets that Xilinx served on a stand-alone basis. A separate enterprise unit now simply called "data center segment" was broken out from what used to be AMD's catch-all for business applications of its chips.
These are the areas that really stood out in Q2. Embedded -- which includes automotive, networking, and other industrial applications from Xilinx -- grew 2,228% year-over-year to $1.26 billion. However, most of that gain came from Xilinx. For the sake of comparison, Xilinx revenue was just $879 million during the same period last year (and just $54 million from AMD last year), so the newly acquired business would have notched a respectable 35% increase as a stand-alone entity. Operating income was a very healthy 51% of segment revenue.
But it's the data center side where things really skyrocketed. Data center sales were up 83% to $1.49 billion, driven once again by AMD's EPYC processors for servers (a computing unit within a data center designated for a certain task). Operating income was also healthy at 32% of segment sales.
Data centers have been a top theme for AMD in recent years as the company gobbles up market share against archrival Intel (INTC 0.27%). Paired with Nvidia's (NVDA 0.97%) GPUs (used as data center computing accelerators), it's been a divide-and-conquer affair for the two designers as they eat into Intel's massive lead. Intel reported a 16% year-over-year decline in its comparable data center and AI group in Q2, hauling in $4.6 billion in sales from that unit alone.
Suffice to say, AMD (and Nvidia, for that matter) has plenty of room to "chip" away at Intel's lead here.
Pockets of softness in some markets, but still a fantastic chip stock
Of course, it wasn't a perfect quarter. As indicated by other chip companies in recent weeks, some areas of weakness are cropping up in pockets of consumer electronics. AMD's gaming segment grew by 32% year over year to $1.7 billion, driven by higher semi-custom sales -- products including, for example, processors for Sony's (SONY 0.36%) Playstation 5. This was offset by a slight decline in PC graphics processor chips -- perhaps a foreboding sign for Nvidia when it reports its Q2 results, although Nvidia has previously said it could see a dip in PC GPU sales ahead of the launch of its next-gen graphics cards this autumn.
Additionally, client segment revenue was $2.2 billion, up 25% from a year ago. While a 25% increase is nothing to balk at, it did drag down overall growth given the size of this unit.
Overall though, AMD's Q2 performance was incredibly robust. Not only did the company expand thanks to the inclusion of Xilinx, but organic growth in its important data center segment continued at a torrid pace. And as discussed last quarter, adding Xilinx to the mix is helping lift AMD's profit margins too. The combined business generated an adjusted operating profit margin of 30%, a huge jump from just 24% last year. The result was that adjusted earnings per share rose 67%. This metric includes some effects from the all-stock merger with Xilinx and acquisition of start-up Pensando but it was nonetheless a huge gain for AMD.
AMD stock now trades for 48 times trailing-12-month free cash flow but only 23 times current year expected earnings. This is a top semiconductor stock as it continues its encroachment onto Intel's turf on multiple fronts. Add in expected long-term growth in cloud computing and data centers, and there's a lot to like about AMD after the Q2 update.