Advanced Micro Devices, Inc. is a semiconductor firm noted for its high-performance computing products and technology.
AMD’s expertise primarily lies in the fields of CPUs, APUs, discrete and integrated GPUs, data center graphics, chipsets, server and embedded processors, game console-related technology, and semi-custom SOC products. The company currently reports under two broad divisions- a) Computer and Graphics and b) Enterprise, Embedded, and Semi-custom.
Is AMD A Good Stock To Buy For the Long-Term?
I believe AMD has all the hallmarks to serve as a fine portfolio stock as it possesses a diversified set of merits that are hard to come by.
Firstly let’s consider the growth profile of AMD; over the last three years, whilst other semiconductor peers have only been able to deliver 12% CAGR revenue growth, AMD has been able to grow at almost 4x this pace, reporting 45% CAGR growth over the same period. Traditionally, the semi-space is known for its strong earnings potential, and this is reflected in the 3-year net income CAGR average of 57% for the entire industry; if you thought that was impressive, then how about AMD’s corresponding 3-year of 132%? Under ordinary circumstances, when you have such a high base, you would expect things to slow dramatically, but looking at estimates for FY22, one can expect another year of strong growth both on the top line and bottom line (expected revenue growth of 60% and expected EPS growth of 57%).
I also want to touch on AMD’s growing FCF prowess; around four years back, AMD was unable to generate any positive annual FCF, but this has improved significantly over the years (from -$142m in FY18 to $3139m in FY21); in fact in the recently concluded Q1, the company generated a record quarterly number of $924m, which was up both sequentially (25%), and annually (11%). Basically, at the current share price, you’re getting a very handy FCF yield of ~2.6%, something that was not even a part of the AMD narrative until 2020.
The improving FCF position also means that the company can afford to be a lot more generous with its distributions; as of now, dividends are not on the cards, but do consider that last year they spent an impressive $1.8bn in cash on repurchase activities (in the three years preceding 2021, they spent less than $100m in aggregate). Interestingly, in Q1-22 alone, they’ve already spent $1.9bn, which is more than last year’s entire figure; investors can continue to be enthused about further buyback support, as the company still has $8.3bn of funds available to be deployed as part of their existing repurchase program!
Given its wide reach across the broad high-performance computing universe, there’s a lot to like about AMD’s product and tech offerings, but I believe the most exciting developments are currently taking place in the data-center business. Amongst all its addressable markets (which total $135bn in aggregate), AMD believes, this business offers the biggest opportunity accounting for ~37% of the total TAM.
This data-center business has witnessed a doubling of revenues across various quarters for well over a year now, and much of this is down to the popularity of its EPYC processors and the growing prevalence of HPC (hyper-scale cloud) customers who are expanding their internal infrastructure deployments. I also believe the addressable market is becoming a lot broader now with a larger chunk of enterprise customers showing a greater appetite for the company’s processors than before (AMD’s win rate with enterprise customers improved even further in Q1).
Whilst it is questionable if AMD can continue to double this business, its intention to deepen its presence in the EPYC space with its new portfolio of products should continue to find plenty of takers and aid the topline; In Q1-22 it launched the Milan-X chipsets (3-D stacked) which are poised to increase technical computer workloads by 66% versus the old generation of products. In H2-22, you will see the introduction of the 96-core Genoa EPYC 7004s which is poised to become the highest performance general-purpose server CPU. Then in H1-23, you will also see another product- the 128-core Bergamo which is meant for high-end hyperscalers.
Besides the core data-center business, one also ought to commend AMD for its recent acquisitions, particularly that of Xilinx (wrapped up in Feb for an acquisition fee of $49bn) which brings a whole host of benefits. Firstly, one ought to consider the quality of IP that AMD is getting through this acquisition; Xilinx is perceived to be an industry authority when it comes to inculcating FPGA (Field Programmable Gate Arrays) programmable logic and is exposed to certain industries where AMD has gaps. AMD will now also have access to Xilinx IP blocks which could not only enhance their overall offering but also bring down costs (potentially reduced dependence on costly IP blocks that were previously licensed from other third parties).
Xilinx is also a very high growth business, having witnessed four consecutive quarters of over 20% growth; incidentally, on a proforma basis in Q1-22, the company delivered $1.04bn of sales, so you’re looking at a base case topline uplift of at least $4bn annually for AMD. This is also a high margin business that should help enhance AMD’s own margins; just for some context in Q1-22; the gross margin variance for AMD with and without the Xilinx business was 200bps. Finally, whilst AMD will have to absorb Xilinx’s outstanding debt obligations of $1.8bn, also consider that it will receive $4bn worth of cash and liquid investments, which have consequently boosted AMD’s own cash and investment position to an impressive $6.5bn as of Q1-22 (from $3.6bn in Q4-21).
What Are Some Of The Risks Associated With AMD?
AMD’s computer and graphics segment has been witnessing declining trends for a while now. Last year, shipments were down by 8% and this has continued into Q1-22 where shipments were down by 7%. Within this, AMD has had to scale down its previous expectations of the PC market which is currently witnessing some softness; prior to the Q1 results they had stated that they expect a flattish performance for PCs in 2022, but now, this has been scaled down even further to a high-single-digit percentage range. In the desktop PC space, AMD has actually seen its market share decline by 1% to 18.3%, even as Intel’s Alder Lake gains traction.
In the high-end discrete GPU space, AMD already faces tough competition from NVIDIA, but this is only going to get worse; after an absence of over two decades, we’ve even seen Intel enter the market this year, with its gaming-focused ARC franchise, which will give AMD’s portfolio a run for its money.
Besides all that, AMD also remains vulnerable to the volatility seen in the cryptocurrency mining space as its GPU products are very popular in this space.
Then, in a high inflationary environment, AMD’s margin progression of late has been rather compelling, but you do wonder if they can keep this up for too long, particularly as recent reports suggest that one of the company’s prominent foundry partners- TSMC is looking to hike prices by 5-8% next year.
Is AMD A Fair Valuation?
I believe AMD is currently rather attractively valued and you won’t find too many opportunities to own such an exemplary growth stock where it is trading at a discount to both its long-term average, as well as its peer set average. Here are some key metrics to consider.
Consensus estimates currently point to an FY22 EPS figure of $4.393, this would imply a forward P/E of a little over 23x, which represents a 33% discount to the stock’s long-term average of 34.3x. It’s also worth noting that AMD’s stock also trades at an 8% discount to the average forward P/E multiple (25.11x) of Seeking Alpha’s entire semiconductor coverage, which currently comprises around 64 stocks.
In an era where investors are viewing growth stocks with more exacting standards, there may be some hesitancy to shed out multiples of over 20x, but even if that’s the case, I’d urge you to then consider the growth potential on offer. AMD’s FY22 EPS estimate of $4.393 represents an earnings growth potential of 58%; in light of that figure, you’re then looking at an incredibly low forward price to earnings growth ratio (PEG) of less than 0.4x! Just for some context, over the last five years, AMD’s forward PEG multiple has averaged more than 1x, whilst the company’s peers from the semiconductor space are currently trading at an average forward PEG of 1.49x!
Closing Thoughts – Is AMD Stock A Buy, Sell, or Hold?
From the last week of November 2021 when it was trading at all-time highs, to the second week of May 2022, the AMD stock had lost almost half its value; after this brutal drawdown, one can now spot certain encouraging developments in the technical imprints of the stock.
If one looks at the price action on the weekly chart, we can see that after a prolonged bout of selling – where it could not break past the descending trendline – the stock has now reached a congestion zone (area highlighted in green), where it spent a lot of time building a base during August 2020- July 2021. You would think this terrain could once again serve as a platform for base building which represents a good zone to accumulate the stock. In the last week of May, we also saw a full-bodied green candle (with no wicks), which broke past the trendline, although I wouldn’t necessarily get overly carried away by this trigger.
Then if I switch over to the smaller time frame- daily chart, one can see rather clear imprints of a typical rounding bottom pattern, which implies that a floor has probably been made.
Finally, also consider that AMD still appears to offer good value against its peers in the semiconductor space, as represented by the iShares Semiconductor ETF (SOXX). The relative strength ratio is still below its long-term average of 0.375, and it is also quite a bit away from the upper boundary of the ascending wedge.