Summary
- Company beats estimates and provides solid guidance.
- Impressive growth set to continue for some time.
- If you believe deal will go through, buy Xilinx instead.
After the bell on Tuesday, we received third quarter results from chip company Advanced Micro Devices(NASDAQ:AMD). As we've seen in a number of recent quarters, management continues to deliver impressive growth and is clearly increasing its market share. The stock hit a new high going into the report on Tuesday as investors continue to love this name, but there's one major issue that makes this particular name potentially not worth an investment at this time.
For Q3, revenues came in at $4.313 billion, which was up 54% over the prior year period. This was the sixth straight beat on the top line, and the fifth straight one of at least $200 million. This revenue number is even more impressive when you consider that at the end of October 2020, the Street wasn't even looking for $3.2 billion in Q3 2021 revenues. Here are the key segment results:
- Enterprise, Embedded and Semi-Custom segment revenue was $1.9 billion, up 69 percent year-over-year and 20 percent quarter-over-quarter.
- Computing and Graphics segment revenue was $2.4 billion, up 44 percent year-over-year and 7 percent quarter-over-quarter.
On a non-GAAP basis, the company expanded its gross margins by 440 basis points over the prior year period. With operating expense growth not rising as fast as revenues, AMD was able to more than double its operating profit over Q3 2020 levels. On the bottom line, adjusted EPS of $0.73 beat Street estimates by $0.07, and rose nearly 80% from the year ago figure of $0.41.
The company produced $764 million of free cash flow in the period. That was up about half a billion dollars from last year's period, although it was down from the $888 million that was generated in Q2 of this year. Management used most of that cash to repurchase more than 7 million shares of stock for $750 million, which looks pretty good with shares now a bit over $120.
For the fourth quarter of 2021, AMD expects revenue to be approximately $4.5 billion, plus or minus $100 million. This roughly 39% year over year increase was well above the $4.25 billion or nearly 31% growth the Street was looking for. As a result, the full year growth forecast was boosted to 65% from 60%, with management also calling for nice sequential non-GAAP gross margin growth in Q4. AMD should easily be able to top $16 billion in revenue this year, tremendous improvement from the less than $4 billion figure posted in 2015.
There is no doubt that AMD is firing on all cylinders right now. Revenue growth continues to beat expectations, and guidance is being raised quarter after quarter. The only problem right now is with the stock itself, and this is because of the pending Xilinx(NASDAQ:XLNX) acquisition. As I have continued to detail, Xilinx shares are trading at a massive discount to the implied deal price. As the chart below shows, the implied discount rose to nearly $40 as of Tuesday's close, the highest level in a couple of months.
If you are a long term AMD believer, and you believe the deal will go through, there is just no reason to buy shares of this company right now. Instead of paying roughly $122 currently, you could pay roughly $175 for Xilinx, and that would get you 1.7234 shares of AMD when the deal goes through. AMD management still seems fairly confident that it's only a matter of time before things are finalized. We haven't received any major news lately, so it's just a matter of regulators making sure everything here is fine.
In the end, AMD delivered another strong quarter, handily beating top and bottom line estimates and giving upside guidance. The stock declined a little in the after-hours session though, as shares had rallied to a new high during Tuesday trading. As great as AMD is right now, I just can't recommend the name if you believe the Xilinx deal will go through, because you are paying a massive premium for shares based on the implied deal price.