Today we are looking back at $AMD, a stock we totally missed in June 2016. Sorry.
When the stock was at $5 we asked: Is there hope for AMD, long-term? Clearly, yes, with the stock at $13 today.
Back then we concluded:
In the last 3 months the stock price has moved by 88%. That's despite revenues in the March quarter off 19% to $832M. Personally I am at a loss as to why the strong performance.
What happened next? At the June quarter AMD stopped going backwards, sales rose single digits. In Sept quarter it was double digit growth. And the stock rose steadily as high as $15 in Feb.
So what next?
First the basics
| Ticker | AMD |
|---|---|
| Sector | Semiconductors |
| Latest price | $13.42 |
| Value | $12,706M |
| Daily vol | $969M |
| Date | 04 October 2017 |
| Financials | SEC Filings |
| Website | http://www.amd.com |
How's the story changed the last 12 months?
From declining sales and losses to double digit growth and profits, there's hardly a nicer turn around!
| $AMD | a year ago | today | change |
|---|---|---|---|
| Price | $6.50 | $13.40 | +115% |
| Target price | $6.25 | $14.20 | +130% |
| Sales forecast | $4.4bn | $5.0bn | +14% |
| EPS forecast | $-0.03 | $0.10 | N/A |
| PE ratio | -ve | 130x | n/a |
And as with many tech stories, when the top line starts growing at double digit rates, the near term PE valuation looks ludicrous. We'll have to think long term!
What's so exciting about AMD?
Well, they used to be the also ran in the microprocessor industry. Always chasing Intel. And when it comes to graphics processing units, they were always chasing Nvidia. But substantial R&D over many many years has finally paid off... with a set of products that are starting to gain traction!
Though let's not get too excited, Intel and Nvidia are the behemoths in those two markets. And then there is ARM, now owned by Softbank.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Advanced Micro Devices, Inc. | $4,619M | -ve | -ve |
| Intel Corporation | $61,711M | 40% | 20% |
| NVIDIA Corporation | $8,344M | 34% | 44% |
So they are still the challenger even though the stock price has surged!
How are the numbers looking?
As I said above, it's a turnaround story.
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A | 2017E | 2018E |
|---|---|---|---|---|---|---|---|
| Revenue | $5.4bn | $5.3bn | $5.5bn | $4.0bn | $4.3bn | $5.0bn | $5.7bn |
| EPS | $-1.60 | $-0.11 | $-0.53 | $-0.84 | $-0.60 | $0.10 | $0.31 |
The expectation is they can add $700m a year to the topline with some nice operational leverage.
And just in case you are wondering about their ability to generate cashflow, well, there is over $500m of net debt on the books, so we shouldn't expect any cashflow to come back to us as dividends in the near future.
Cheap, no.
Let's look at the figures for 2018, when AMD is expected to earn over 30 cents a share. At 40x earnings it's not a bargin, but if the moment is there, with market share gains and margin gains, it's not a shocking price.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| AMD.O | $12,706M | 40x | N/A | 0% | N/A |
| Peers | |||||
| INTC.O | $185,047M | 13x | 9% | 3% | 13% |
| NVDA.O | $107,622M | 45x | 12% | 0% | 2% |
| Other Semis | |||||
| TSM | $189,812M | 18x | 15% | 3% | 13% |
| AVGO.O | $97,711M | 15x | 18% | 2% | 6% |
| TXN.O | $89,044M | 22x | 10% | 2% | 8% |
| MU.O | $44,975M | 5x | N/A | 0% | 0% |
If we do our standard back-of-the-envelope, assuming earnings go up 20 cents a year, i.e. $0.10 ,$0.30, $0.50... for 30 years and discount it as 8% then the net present value is worth over $20 a share.
And if we look at sales multiples it's trading on 3x in line with Intel and a substantial discount to NVDA at 13x.
So, the valuation doesn't look expensive, given the turn-around. Though clearly it is not a bargain.
Watch out for dilution
Back in 2016 they issued a convertible. It's way in the money, with owners able to convert their debt at $8 a shares. The further the stock rises the bigger the next dilution to common stock holders.
And on top of this they've a strategic investor who dumped stock in August still has a substantial stake. So there is a headwind here, as these folks sell down.
Wall Street doesn't care
The professionals on Wall Street have a $14.23 for AMD, i.e. a paltry 6% upside. Despite 4 quarters of double digit growth, their recommendation to clients is Hold.
Though we have to remember that Wall Street has been in catch up mode for over 2 years, with a target price below the share price and a hold recommendation all the time.
Seems that they, like me, missed the inflection point.
Are we too late?
Fortune favors the brave. A year ago, you'd have been brave.
Today, not so. I can see the potential to double my money within 5 years. If the current trends are sustainable. Though it's no longer a moonshot.
If you are a believer in their market position vs Intel and Nvidia, then I can see why you'd be willing to buy. But if you think they are still a me-too chip maker, then best you stay away.
Like a year ago, I'm stuck on the fence. I just don't understand the tech well enough to make that call. Sorry.
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Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Submitted October 04, 2017 at 11:23AM by shane_stockflare http://ift.tt/2wx3FdT
