Summary
AMD has long been one of our favorite technology picks and investing in it has benefited our readers well.
Despite that, we feel the market has run up too much this time, especially with increased competition from Intel and Nvidia.
The company’s all-stock Xilinx acquisition combined with share buybacks at current prices could put additional pressure at its valuation.
We recommend, depending on your tax basis and personal investment targets, either cautiously holding or selling your investments.
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vchal/iStock via Getty Images Advanced Micro Devices (NASDAQ: AMD ) has long been one of our highest convention technology investments. Roughly a year ago, we explained how we expected the company’s strong performance to continue. The sum total of our recommendations has been ~70% annualized returns for our followers. However, as we’ll see throughout this article, we think AMD is finally overvalued. AMD Addressable Markets
AMD is focused on dramatically growing within its addressable markets. AMD sees itself as having a $79 billion total addressable market, split across Data Center, PCs, and Gaming. The company has major competitors here, including Intel (NASDAQ: INTC ) and Nvidia (NASDAQ: NVDA ) as the two largest. The company currently has ~$17 billion in annual revenue, meaning a 20% share in this market.
These addressable markets are an essential part of AMD’s continued ability to perform. AMD Earnings
AMD has achieved strong earnings showing the strength of the company’s portfolio. However, it also indicates some risk. AMD Earnings – AMD Investor Presentation
AMD saw record quarterly revenue of $4.3 billion, up 54% YoY and 12% QoQ. The company saw a 48% gross margin, as it’s managed to both grow revenue and gross margin showing the strength of its business. That’s driven significant EPS growth. The company is currently trading at an EPS of roughly 50x, an expensive but not outrageous valuation.
However, these quarterly results also highlight two risks. The first is the company has started repurchasing shares under its new $4 billion authorization. Its average repurchase price is $110/share so far, and the company spent 98% of its FCF on repurchases indicating an interest in continuing.
Secondly, as AMD’s stock price has gone up, so too has the cost of its massive Xilinx acquisition. The deal, which will add ~425 million new shares of AMD to the market, could be a catalyst for extended selling pressure given its expected year-end close. From an initial $35 billion acquisition price, the price has now almost doubled to $60 billion.
Xilinx, while performing well, is not worth anywhere near $60 billion in our opinion with similarly dominating growth. The company’s annual FCF of ~$1 billion versus the market capitalization highlights a more expensive acquisition. We expect the mix of new shares along with buybacks putting more pressure on the company. AMD Competition
Part of our thesis is that, despite AMD’s continued execution, its competition has finally figured out how to catch up. Supported by the silicon shortage, which AMD expects to continue into mid-2022 , a lack of supply means less investment and new model development. That has given the company’s competitors a chance to come up.
Intel, despite its consistent manufacturing delays, expects to reach parity with TSMC over the next several years . Given that at various nodes (i.e., 10 nm or 7 nm) Intel tends to outperform , that’s a risk indicating that AMD could no longer have the manufacturing and process dominance that it had with the initial Ryzen release.
Additionally, the company also faces GPU competition. GPU wise, Nvidia and AMD are expected to be roughly equivalent . However, a new entrant, one with significant non-discrete GPU experience, Intel, has announced it’s planning to enter the market in 1Q 2022 . In the high-end GPU market, Nvidia continues to dominate.
Lastly, competition comes from outside of the x86 realm. Apple ( AAPL ) has moved away from Intel CPUs and many other companies that use AMD CPUs might move away as well. Many of the largest customers, once much smaller than the silicon companies they ordered from, now have the size and scale to make their own processors.
This competition can hurt the company’s continued ability to grow as it has been. AMD and Lack of TSM Exclusivity An example of the increased competition AMD is facing is Intel’s decision to move out of what has been one of the company’s limiting factors […]
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