AMD is no longer an “underdog”, and future growth projections do not necessarily justify its current valuation. In this note, we review AMD’s Q3 results and guidance.
Furthermore, I provide a pro-forma valuation of AMD (+Xilinx). The easy money has been made in AMD over the last six years, and future returns may look very different.
AMD is a decent buy at $122, however, potential investors should buy through Xilinx at $185 (a discounted proxy for AMD) (after Dr. Lisa Su’s reassurances about the merger).
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JHVEPhoto/iStock Editorial via Getty Images Introduction
Advanced Micro Devices ( AMD ) is probably one of the greatest turnaround stories ever, and investors have made incredible returns in this counter over the last six years. Under the leadership of Dr. Lisa Su, AMD has showcased tremendous business execution, and the company delivered yet another blowout quarter on Tuesday.
As some of you may already know, I am an “Intel ( INTC ) bull”; however, I am not an “AMD bear” like some of the commenters in my recent articles have suggested. Today, I would like to explain my positioning in the semiconductor sector in some greater detail. First of all, we own Intel as a part of our dividend growth portfolio, which also consists of the likes of Broadcom ( AVGO ). Since AMD offers no dividend, it is unsuitable for BTM’s DGI portfolio. On the other hand, AMD’s risk/reward is keeping the stock out of our Goldilocks Zone (high growth) portfolio. Within this portfolio, we own Nvidia ( NVDA ) from a very low cost-basis; however, we are not adding at current valuations. Source: YCharts
Today, AMD’s market cap stands at ~$150B, and it is quickly closing the gap on Intel, which is now valued at just ~$195B. Now, Intel does ~5x AMD’s revenue, commands higher gross margins, and produces ~6x AMD’s free cash flow. Considering these numbers, AMD seems expensive; however, growth is on AMD’s side due to superior products, product roadmap, and business execution.
In this note, we will briefly analyze AMD’s Q3 report and formulate its valuation to see if this stock is a good long-term investment. Furthermore, we will explore a merger arbitrage play available in the AMD-Xilinx ( XLNX ) deal. So, let’s get started. Reviewing AMD’s Quarter And Forward Guidance
In Q3, AMD’s revenue blew past analyst estimates to come in at $4.3B (up 54% y/y), and looking at the quarterly sales trend, it is fair to say that AMD’s business is gaining momentum. Although the growth rates are decelerating due to tough comps from last year’s PC boom, AMD’s data center business is on fire and set to deliver greater numbers in 2022 and beyond. Here are the highlights from each of AMD’s business segments: Source: AMD Q3 2021 Earnings Presentation
With its Ryzen, Radeon, and EPYC processors, AMD is winning market share across the CPU, GPU, and server (data center) markets. Over the last few years, AMD’s products have been far superior to those of Intel’s, and with a strong product roadmap, AMD looks good value for a greater chunk of the expanding semiconductor industry.
As the industry continues to grapple with supply shortages, AMD has focused its resources on higher-value chips. Naturally, AMD’s gross margins have expanded significantly over the last few quarters. In Q3, AMD’s gross margins improved by ~450 basis-points y/y to reach 48%. With a sharp rise in margins, AMD is delivering massive operating leverage, as evidenced by the ~111% y/y jump in operating income. As you can see below, AMD’s operating margins have risen from 16% (Q3 2020) to 22% (Q3 2021). Overall, AMD’s business is firing on all cylinders with rapid sales growth, massive margin expansion, and a big jump in profitability. Source: AMD Q3 2021 Earnings Presentation
As it turns into a cash printing machine, AMD’s balance sheet is turning into a fortress. At the end of Q3, AMD had cash balances of ~$3.6B with total debt of just ~0.3B. After teetering near bankruptcy at the start of the 2010s, it is fair to say that AMD has come leaps and bounds. Right now, AMD looks very well-positioned (from a financial and technological perspective) to win a more significant market share in a secular growth industry. With ample cash on its balance sheet, AMD used nearly all of its free cash flow on repurchasing shares […]