Advanced Micro Devices (AMD 1.73%) stock's impressive start this year was under threat as the Jan. 31 release of its fourth-quarter 2022 earnings report approached. But after its release, investors seem to give the chipmaker's results and guidance a thumbs up, as the stock headed further north.
Share prices of the chipmaker jumped a whopping 12% following the release of its earnings report. That's impressive, as the odds were stacked against AMD in Q4 because of a sharp decline in sales of personal computers (PCs). Still, AMD managed to deliver a 16% year-over-year increase in revenue to $5.6 billion, driven mainly by its acquisition of Xilinx, which gave a major boost to the company's embedded business.
The company's first-quarter 2023 guidance, however, points toward a 10% year-over-year drop in revenue to $5.3 billion thanks to the ongoing weakness in the PC market that will negatively impact sales of AMD's CPUs (central processing units) and GPUs (graphics processing units). Also, a non-GAAP gross margin forecast of 50% for the current quarter indicates that AMD's earnings will contract, as that would be lower than the year-ago period's adjusted gross margin of 53%.
But investors would be making a mistake if they sell AMD stock just on this near-term guidance news. There were also some positive takeaways from the company's latest quarterly report that suggest the stock can maintain its momentum and head higher in 2023 and beyond.
The data center business may have another solid year
AMD finished 2022 with a 44% jump in revenue to $23.6 billion. The data center business played a key role in this impressive growth, as the segment's revenue increased 64% to $6 billion. What's more, the data center business produced 30% of AMD's total revenue in the fourth quarter of 2022, with the segment's revenue jumping 42% over the prior-year period.
On the latest earnings conference call, AMD management credited its impressive data center growth to the "increased adoption of our EPYC processors by cloud providers." Additionally, the adoption of AMD's server processors at hyperscale cloud computing providers more than doubled over the prior-year period.
AMD's data center progress is visible in the way its market share in servers is increasing. It controlled 17.5% share of the server market in the third quarter of 2022, which was its 14th consecutive quarter of gains. Even better, AMD is expected to end 2023 with a 30% share of the server processor market thanks to its latest launches, according to KeyBanc Capital Markets. That would be a nice jump from the 22% share that AMD is reportedly sitting on at present. JPMorgan also expects AMD to record seven to eight points of market share gains in servers this year to a range of 28% to 30%.
The good part is that AMD's fourth-generation EPYC data center server processors are already witnessing solid adoption by cloud service providers and server OEMs (original equipment manufacturers). More specifically, AMD saw a 40% increase in the number of server platforms being developed using its latest processors from the likes of Dell, Hewlett Packard Enterprise, Lenovo, and Super Micro, among others.
As such, AMD's data center business seems on track to deliver impressive growth once again this year, and that should help the stock sustain its impressive rally.
The embedded business could be another major catalyst
AMD acquired Xilinx last year, which opens up a huge opportunity for the chipmaker. Xilinx provides embedded chips like field-programmable gate arrays (FPGAs) and adaptive compute acceleration processors.
The market for these chips is huge, as they are deployed across multiple industries such as industrial, automotive, healthcare, aerospace and defense, and communications. AMD estimates that the total addressable market (TAM) for Xilinx's chips could hit an impressive $33 billion by 2025.
Xilinx generated $3.9 billion in trailing-12-month revenue at the end of March 2022. It is also worth noting that AMD's embedded business produced $4.55 billion in revenue in 2022, up from just $246 million in 2021 thanks to the Xilinx acquisition. These numbers suggest that there is still a lot of room for growth in the embedded business for AMD.
Given that the data center and the embedded business produced close to 45% of the chipmaker's top line last year, they could help AMD outperform analysts' expectations in 2023. However, there is one more development that could be a tailwind for AMD stock this year that investors may want to keep an eye on.
A dovish Federal Reserve could be a tailwind for the stock
Cooling inflation led the Federal Reserve to increase the benchmark lending rate by 25 basis points at its latest policy meeting. The central bank has been in a hawkish mood since March 2022 with eight interest rate hikes, which include four consecutive hikes of 75 basis points.
Higher interest rates took a toll on growth stocks such as AMD last year. But now that the Fed is dialing back the pace of rate hikes and chairman Jerome Powell is forecasting that there may be two more hikes in the cards, Wall Street anticipates a pivot and potential rate cuts in the second half of the year. These developments could help the stock market sustain its impressive start for the rest of 2023. AMD is likely to benefit in a bull market scenario since the catalysts in the data center and embedded businesses could help it keep investor confidence high.
As a result, it wouldn't be surprising to see this semiconductor stock head higher as the year progresses, which is why it would be a mistake for investors to sell AMD based on the current quarter's guidance, as it seems capable of hitting a Street-high price target of $200 per share.
