Advanced Micro Devices Inc Fundamental Analysis
Disclaimer: This article by The Globetrotting Investor is general in nature. We aim to bring you long-term focused analysis driven by fundamental data, hence, providing you commentary based on historical data and analyst forecasts only using an unbiased methodology. This is not a buy/ sell recommendation, and it is solely for educational purposes. Please do your research before investing. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Please read the full disclaimer here.
Advanced Micro Devices Inc
Last Updated: 12 Dec 2023
NASDAQ: AMD
GICS Sector: Technology
Sub-Industry: Semiconductors
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Table of Contents
You can download a summary of Advanced Micro Devices Inc's fundamental analysis in PDF here.
Management
CEO: Lisa Su
Tenure: 9.3 years
Advanced Micro Devices Inc's management team has an average tenure of 6.5 years. It is considered experienced.
Source of Revenue
Advanced Micro Devices, Inc. is a global semiconductor company. The company focuses on high-performance computing technology, software, and product leadership.
AMD operates in four reportable segments:
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Data Center segment
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Client segment
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Gaming segment
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Embedded segment
AMD also sells or licenses portions of its intellectual property (IP) portfolio.
Data Center Segment
The Data Center segment uses server CPUs, GPUs, DPUs, FPGAs, and Adaptive SoCs to handle computational and visual data processing needs. Data centers require high-performance, energy-efficient, scalable, and adaptable computing solutions due to the increasing volume of data. Combining these components optimizes performance and power for various workloads. Key products include:
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AMD EPYC Series Processors: High-performance CPUs for various tasks and workloads.
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FPGAs and Adaptive SoCs: Devices that accelerate workloads in data centers, edge computing, and the cloud.
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AMD Accelerated Parallel Processing (GPGPU): Advanced technology utilizing GPUs alongside CPUs for faster computational tasks and better application experiences.
Client Segment
AMD's CPUs team up with chipsets and GPUs to create computing platforms that make systems more stable, perform better, and use power more efficiently. By linking memory controllers and I/O channels directly to CPU cores, AMD's technology improves overall performance. Key products include:
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AMD Ryzen™ Series: High-performance processors for gamers and content creators. Ryzen 7000 with "Zen 4" architecture and Ryzen 5000 featuring gaming enhancement with 3D V-Cache on "Zen 3" architecture.
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AMD Ryzen™ Mobile Processors: Efficient yet powerful CPUs for notebooks. Ryzen 7000 with up to 16 cores on "Zen 4," Ryzen 6000 on "Zen 3+," and Ryzen 5000 on "Zen 3" architectures offer performance and battery life balance.
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AMD Chipsets: Support platforms like AM5 and AM4. Various chipsets, including X670, B650, X570, B550, A520, B450, A320, and WRX80, cater to different Ryzen and Threadripper series, offering different levels of performance and features.
Gaming Segment
AMD's graphics processing, found in APUs, GPUs, SoCs, or combined discrete GPUs, accelerates image rendering and enhances resolution and color definition. Their graphics tech spans PCs, workstations, and major gaming consoles like PlayStation 5 and Xbox Series S™ and X™. RDNA architectures power high-performance gaming, offering features like ray tracing and variable rate shading. APUs merge CPU and GPU, while discrete GPUs deliver top-notch graphics. Collaborating with manufacturers, AMD tailors semiconductors to specific needs, leveraging their technology for gaming consoles and customized solutions.
Embedded Segment
In AMD's Embedded segment, they offer embedded CPUs, GPUs, APUs, FPGAs, and Adaptive SoCs, catering to diverse industries like automotive, industrial, defense, and more. These products serve applications needing varying performance levels, emphasizing features like low power, compact sizes, and continuous operations. High-performance graphics and support for multiple operating systems are key in some systems while meeting rugged specifications for harsh conditions is crucial. The market trend leans toward standardized architectures to reduce costs and speed up development.
The company sells products directly and through independent distributors and sales reps in domestic and international markets.
One customer accounted for 16% of its consolidated net revenue for the year ended 31 Dec 2022. Sales to this customer consisted of sales of products from its Gaming segment. A loss of this customer would have a material adverse effect on AMD’s business.
Advanced Micro Devices Inc Reportable Segment Revenue FY2022
Advanced Micro Devices Inc Economic Moat
Advanced Micro Devices Inc Economic Moat
Economic Moat: Narrow
There are many ways to identify Advanced Micro Devices Inc’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Advanced Micro Devices Inc. Please check my summary to understand more about the economic moat.
Performance Checklist
Is Advanced Micro Devices Inc’s revenue growing YoY for the past 5 years consistently? Inconsistent.
Is the net income growing YoY for the past 5 years consistently? Inconsistent.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Yes.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Yes.
Is the EPS growing for the past 5 years? Inconsistent.
Advanced Micro Devices Inc Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Inconsistent.
Advanced Micro Devices Inc FCF per Share
Management Effectiveness
Is Advanced Micro Devices Inc’s ROE consistently at 12%-15% YoY for the past 5 years? Inconsistent.
Advanced Micro Devices Inc Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? Inconsistent.
Advanced Micro Devices Inc Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is increasing, which is something that an investor would not be pleased to see.
Advanced Micro Devices Inc Shares Outstanding (Million Shares)
Advanced Micro Devices Inc Financial Health
Advanced Micro Devices Inc Financial Health (USD Million)
Current Ratio: 2.2 (pass my requirement of >1.0)
Debt-to-EBITDA: 0.7 (pass my requirement of <3.0)
Interest Coverage: 14.4 (pass my requirement of >3.0)
Debt Servicing Ratio: 4.3% (pass my requirement of <30.0%)
Dividend
Current Dividend Yield: Advanced Micro Devices does not have a record of paying a dividend.
Advanced Micro Devices Inc Stock Performance
The following graph shows a five-year comparison of cumulative total return on AMD common stock, the S&P 500 Index, and the S&P 500 Semiconductor Index from 30 Dec 2017 through 31 Dec 2022. The past performance of AMD common stock is no indication of future performance.
Advanced Micro Devices Inc Stock Performance
Advanced Micro Devices Inc Intrinsic Valuation
Estimated intrinsic value: $29.62
Value is calculated using the discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$2,900M
Projected growth rate: 8% - 11%
Beta: 1.7
Discount rate: 10.5%
Margin of safety: 40% (Uncertainty: High)
Price range after the margin of safety: <$18.00
Date of calculation: 13 Dec 2023
Advanced Micro Devices Inc Valuation
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
Advanced Micro Devices Inc Intrinsic Valuation
Advanced Micro Devices Inc Relative Valuation
Advanced Micro Devices Inc EV-to-EBITDA vs its peers
Advanced Micro Devices Inc Price-Earnings Ratio vs its peers
Advanced Micro Devices Inc Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
Intel’s dominance in microprocessors shapes market standards, influencing sales, pricing, and AMD’s competitiveness. Their control over industry benchmarks and computer systems, coupled with extensive resources, marketing, and R&D investments, pose continual challenges. Intel’s aggressive strategies, rebates, and potential actions in GPUs and other segments could significantly impact AMD’s sales and pricing, affecting its position.
The semiconductor industry is also highly cyclical and has experienced significant downturns, often in conjunction with constant and rapid technological change, wide fluctuations in supply and demand, continuous new product introductions, price erosion and declines in general economic conditions.
Another risk is the overreliance on a small number of customers for a significant portion of its business. If one of the key customers decides to stop buying AMD products or reduces its demand, it will greatly impact AMD’s profitability.
Summary for Advanced Micro Devices Inc
AMD's economic moat is rooted in its intangible assets, notably its prized x86 instruction set architecture license and its prowess in chip design. This unique position springs from the exclusive x86 licensing agreement shared by AMD and Intel, effectively establishing a duopoly that commands the PC and server markets.
The x86 license serves as a barrier, barring other major chipmakers like Qualcomm or Broadcom from easy entry. While historically smaller in x86 chip supply compared to Intel, AMD's recent strides in offering more competitive products, leveraging third-party foundries like Taiwan Semiconductor Manufacturing, has strengthened its standing. In contrast, Intel has faced challenges in manufacturing execution, further propelling AMD's advancement.
Given the expertise, AMD is also well-positioned to enjoy data centre growth driven by the shift from on-premises to cloud computing.
AMD's GPU expertise in parallel processing is increasingly valuable for AI applications due to its efficiency in running matrix multiplication algorithms. However, Nvidia currently dominates the AI training workload with its superior GPU hardware and proprietary CUDA software platform, limiting the easy porting of AI models to AMD hardware.
Despite Nvidia's dominance, leading cloud vendors seek alternatives to maintain vendor balance, potentially opening doors for AMD if they enhance their software capabilities for AI training. In-house chip development remains a priority for large-scale cloud providers, but partnerships with AMD might emerge if their software offerings improve for AI model training on their GPUs.
AMD faces relatively low switching costs as PC and server CPU customers can easily pivot between Intel and AMD. Additionally, the short life cycle of these devices means that a design win in a specific model doesn't guarantee repeat business.
Considering these factors, despite its significant intangible assets, AMD's economic moat is relatively narrow in the grand scheme.
Over the last five years, Advanced Micro Devices Inc's performance has seen a mix of consistency and variation. While the revenue and net income growth have shown inconsistencies, the cash flow from operating activities has demonstrated consistent growth year-over-year. Notably, the company has maintained positive free cash flow throughout this period, indicating financial stability.
The gross margin percentage has shown growth over the past five years, reflecting efficiency in operations. However, the EPS and free cash flow per share have been inconsistent in their growth over the same period.
AMD’s capital allocation strategy has shown inconsistencies over the past five years. While aiming for a 12%-15% ROE and ROIC annually, the company has struggled to maintain this range consistently. Both metrics have fluctuated, falling short of industry averages and the company's WACC.
Additionally, the trend in the number of shares outstanding has been on the rise, a concerning trend for investors as it dilutes ownership and earnings per share.
AMD's financial health appears robust and well-maintained based on key metrics. With a current ratio of 2.2, the company showcases strong short-term liquidity, comfortably surpassing the benchmark of 1.0. The debt-to-EBITDA ratio stands at 0.7 indicating manageable debt levels in relation to earnings.
Moreover, an interest coverage ratio of 14.4 highlights AMD's capacity to cover interest expenses comfortably, exceeding the desired minimum of 3.0. The debt servicing ratio of 4.3% demonstrates the company's ability to manage debt payments efficiently, comfortably below the 30.0% benchmark.
Investing in AMD demands a cautious approach despite its position in the tech industry. The company's narrow economic moat and unsatisfactory performance in capital allocation raise concerns about its long-term competitive advantage and financial decisions. However, AMD boasts a healthy balance sheet, which serves as a stabilizing factor.
Yet, the significant uncertainty surrounding its future performance calls for a high margin of safety of 40% to offset risks. While the company operates in a dynamic sector with growth potential, its inconsistent track record and uncertain trajectory warrant a careful evaluation and a substantial buffer against potential fluctuations, making it crucial for investors to tread cautiously when considering investment in AMD.
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