Advanced Micro Devices Inc. (AMD) Stock Analysis 2021


0
amd stock valuation

Advanced Micro Devices Inc. is an American multinational semiconductor company that develops computer processors and related technologies for business and consumer markets. In this article we will analyze if it is worth buying AMD stock at the current price.

Part 1: Factors to Consider Before Buying AMD Stock

Positives

  1. Q2 2021 Earning Highlight: Gross profit was up 99% year over year while net income was up 352%. 
  1. Strong Management: Management has executed the company’s strategy admirably as they managed to reduce debt and increase cash during the pandemic.  
  1. AMD like Intel has started investing in the embedded device business as the core PC business has been consistently weak.  
  1. AMD is in the process acquiring Xilinx, the pioneer in field-programmable gate arrays (FPGAs) chips. This will help boost AMD’s data center market and reinforce its total addressable market (TAM) of $110 billion.  

Negatives

  1. While the fundamentals and recent performance has been strong, we feel the stock price is overextended thanks to people overbuying the stock during the pandemic. 
  1. AMD has significant customer concentration from Sony and Microsoft. Loss of any one of these customers will massively hurt the top line.
  1. Stiff competition from Intel and NVDIA. NVIDIA’s acquisition of ARM Holdings, might aid the acquirer to provide full stack CPU-GPU offering, which poses a headwind for AMD.
  1. AMD derives a significant proportion of its revenues from outside the United States (77% in 2020, up from 74% in 2019). Revenue may have negative impact due to exchange rate instability and any macroeconomic unpredictability

Part 2: AMD Valuation Analysis and Price Forecast

TLDR

Projected Intrinsic Stock Price in 2030USD 118.2
Yearly Internal Rate of Return (IRR)1.1%
5-Year Revenue GrowthIncreasing
5-Year EBITDA GrowthIncreasing 
5-Year Free Cash Flow GrowthIncreasing
Average Net Debt / EBITDAExcellent
Average EV / EBITDAWay Above Industry Average

Market Capitalization and Share Analysis


.

  • AMD’s market cap has grown by over 1500% in the last 5 years – from 8 billion in 2016 to 134 billion at the time of writing.  
  • During this time the gap between their enterprise value and market cap has not changed as the company has very little debt.  
  • Instead of issuing debt, AMD has raised cash by diluting shares. Outstanding shares have increased consistently at a CAGR of 8.1%. While in most cases this would be concerning, however, AMD has compensated for it by issuing no debt over the last 4 years. 

Revenue and Earning Analysis

  • AMD’s revenue has been increasing steadily over the last 5 years at a CAGR of 18%.
  • Similar to revenue, EBITDA has also grown year over year over the last 5 years at a CAGR of 18.5%. 

Cash Flow Analysis

  • AMD’s free cash flow numbers were concerning in the past but 2019 and 2020 has seen rapid growth to bring 5 year CAGR to 126.6%. 
  • Same story with FCFE, which was negative until 2020 when it had a 6 fold jump year over year.

Debt Analysis

  • Total debt for AMD has decreased over the last 5 years at a CAGR of 25.5%.  
  • Reduction of debt and an increase of EBITDA at the same time has resulted in Net Debt/EBITDA to drop below zero. We consider 3 to be an acceptable number for this ratio, below zero means AMD’s numbers are almost perfect.

.

Comparable Companies Analysis

We are using enterprise value and EBITDA analysis in order to understand whether AMD is overvalued or not compared to its competitors. The horizontal axis represents the EBITDA, the vertical axis represents the EV / EBITDA, and the size of the bubble represents the enterprise value. The closer the stock is to the top left of the graph the more likely it is overvalued when compared to its competitors. 

  • In this analysis, AMD appears to be overvalued with a really high enterprise multiplier (EV/EBITDA) and a small EBITDA compared to some of its competitors like Intel and TSM. 

Forecast Using FCFE Growth Method

We forecast future price by estimating the growth of free cash flow to equity per share and then adjust it using free cash flow to equity yield. FCFE yield is the ratio of FCFE per share and price per share.

  • FCFE yield for AMD has grown consistently over the last 5 years as their free cash flow has seen a positive trend. However, their fcfe yield was below zero until 2020. As a result we are using the 2020 number of 0.5 as its “average”. 
  • The last three year average FCFE per share is around 0.06. For growth rate, we used a custom list as AMD has been performing better than it has historically in the last few years. We projected annual growth of 30% for the next 5 years and then lowered it to 20% for the next 5. 
  • The intrinsic value for the share price in 2030 using these assumptions is around USD 118.2. 

Verdict

  • Buying an AMD stock at or around USD 110 now can provide a 1.1% internal rate of return (IRR) per year. However, at USD 100 per share IRR increases to 2.2% while a purchase at USD 120 will net 0.1% IRR every year.
  • AMD is overvalued at USD 100 when compared to the market index growth in the last 10 years. 
    • AMD’s fundamentals and recent trend has been excellent including a strong Q2 2021 performance. However, this has also meant a massive surge in buying the stock, which in turn has made this stock overvalued at its current price. 

This is not a financial advice. Please read the disclaimer.


Like it? Share with your friends!

0