AMD Stock: Superb Execution (NASDAQ: AMD)
Advanced micro-systems (NASDAQ: AMD) is a global semiconductor company specializing in CPUs, GPUs, server processors and game console technology. Riding on the growth of the semiconductor industry, AMD’s revenue has skyrocketed over the past few years, and I expect the upward trend will continue over the next few years. Their traditional core business (CPUs, GPUs and server processors) will continue to grow, and expansion into high-margin programmable logic devices via the acquisition of Xilinx will add strong revenue growth as well as margin expansion. I think AMD is a great investment option because:
- AMD’s revenue growth is multifaceted: computing, graphics, enterprise and servers. This multifaceted growth will continue for the foreseeable future.
- The acquisition of Xilinx is a great move, which will bring further revenue growth and margin expansion.
- Superb growth execution and increasing efficiency are evident in various financial and operational metrics.
Superior revenue growth
AMD management’s superb execution of its growth plan is clearly working, driving multifaceted growth across all business segments. Last quarter, the Computing and Graphics segment grew 33% YoY, led by Ryzen and Radeon, while the Enterprise, Embedded, and Semi-Custom segment grew 88% YoY, led by the EPYC processor. Overall, AMD’s revenue grew 71% year-over-year and 22% sequentially. This outstanding result is not really surprising given their broad and deep product portfolio which includes data centers, games and integrated semiconductors.
Superior technology is a key driver of this growth. For example, their new EPYC processors (higher core count and more PCI Express lanes) with 3D stacked chiplets extend their performance leadership in technical computing workload by 66%. Formerly code name “Milan-X“, the new processors have the largest L3 cash flow in the industry and deliver exceptional performance for technical computing like computational fluid dynamics, finite element analysis, and electronics design automation. From leading companies industry players like Cisco (CSCO), Dell (DELL), HPE (HPE) and Lenovo (OTCPK:LNVGY, OTCPK:LNVGF) have all launched servers with the new processors, and I expect the footprint from AMD continues to rise.
Acquisition of Xilinx
Xilinx designs and develops programmable logic products for communications, industrial, consumer, automotive and data processing. Not only do they have a large customer base across multiple industries, but their technological strength has also led to their systems being chosen by the prestigious European CERN laboratory and the United States Air Force Research Laboratory.
Also, the part that excites me the most about Xilinx technology is their future in the robotics market. There is growing interest in incorporating greater automation into manufacturing to help alleviate labor shortages and safety concerns. To produce better and faster robots, a heterogeneous calculation model is required: CPU and GPU for control flow calculations, and FPGA (Field Programmable Gate Arrays) for data flow calculations. By purchasing the Xilinx FPGA powerhouse, AMD, which already had a strong position in CPUs and GPUs, will be in a unique position to deliver excellent robotics compute packages. It is a segment with a lot of growth potential.
Mendocino Consumer Mobile Platform
At the end of May, AMD unveiled its new mobile platform Mendocino, and this new platform should bring strong revenue growth. The new platform features a Zen 2 4C/8T architecture (4 cores and 8 threads) on TSMC’s (TSM) 6nm process (which offers 18% higher logic density). With the Mendocino platform, AMD is essentially bringing high-end features to a more affordable laptop. Intel (INTC) has always dominated the affordable laptop segment, but with Mendocino (high performance at a lower price), AMD will now be able to challenge Intel in this segment. Mendocino is expected to launch later this year, and I expect the plan to work in AMD’s favor.
A plan is great, but without proper execution, a business cannot succeed. In this regard, AMD is doing an incredible job in executing its growth plan. The aforementioned revenue growth is superb. AMD’s annual revenue growth (65.26%) is well above that of its peers: QUALCOMM (QCOM) (33.51%), INTC (0.0%), Micron (MU) (27.08 %), etc. margin now at 48% (2% more than a year ago). Additionally, their net income margin (17.98%) is well above the industry median (4.76%).
This strong growth and improved operating efficiencies translate into strong cash flow from operations ($3.6 billion) and EPS growth of 117% year-over-year. With organic growth already coming from the data center and server business, combined with the acquisition of Xilinx, I expect AMD to continue growing and capturing even more synergies through strong execution.
Estimation of intrinsic value
I used a DCF model to estimate the intrinsic value of AMD. For the estimate, I used EBITDA ($4.8 billion) and the current WACC of 8.0% as the discount rate. For the base case, I assumed 30% EBITDA (average revenue growth over the last 5 years) for the next 5 years and zero growth thereafter (zero terminal growth). For the bullish and very bullish cases, I assumed cash flow growth of 32% and 35%, respectively, for the next 5 years and zero growth thereafter.
The estimate revealed that the current share price represents an upside of 25-30%. Given their strong multi-faceted growth trajectory, impressive execution, and acquisition of Xilinx, I expect AMD to realize this long-term advantage.
Very bullish case
The assumptions and data used for the target price estimate are summarized below:
- WACC: 8.0%
- EBITDA growth rate: 30% (base case), 32% (bullish case), 35% (very bullish case)
- Current EBITDA: $4.8 billion
- Current stock price: $88.11 (22/07/2022)
- Tax rate: 20%
Cappuccino Stock Rating
Economic Gap Strength (4/5)
AMD and Intel essentially share a duopoly in the CPU market. AMD’s market share was up against Intel. Using their market share and technological advantage, they are able to charge a high premium on their products. AMD also has a formidable portfolio of adaptive data centers, games and SoCs.
Financial strength (5/5)
Exceptional profitability and cash generation allow AMD to build a strong cash position. AMD has $6.53 billion in cash versus $2.16 billion in debt, giving them negative net debt. In addition, their liquidity (current ratio at 2.4x and quick ratio at 1.8x) is very solid.
Growth rate vs sector (4/5)
Following the boom in the semiconductor segment and their leading position in the market, AMD has grown much better than the industry. Moreover, as mentioned earlier, their growth is multifaceted. I expect them to overtake the entire industry for the foreseeable future.
Safety margin (5/5)
The tech sector has suffered greatly in recent months, and AMD stock is no exception. Its stock fell from $150 in November 2021 to around $80. Based on the intrinsic value estimate shown above, AMD is easily undervalued by 25-30% at this point.
Sector outlook (4/5)
The need for semiconductors will only grow in the future, so I would say this segment has a bright future. However, the semiconductor segment is notoriously cyclical and the margin can vary significantly. Therefore, it is difficult to justify a 5.
Several large banks reported their earnings, and most bank CEOs warned of the risk of a recession later this year. Much of AMD’s revenue comes from disposable consumer products such as desktops, laptops, and game consoles, so a drop in consumer spending can negatively impact their revenue.
Although I believe in the future of the robotics market, it is still a young and growing market. The growth rate (expected at 16% per year) could certainly be lower than expected. Additionally, installing robotics and automation is a capital-intensive business, so tougher economic conditions could cause companies to tighten their purse strings and reduce capital expenditures. in manufacturing sites in the near term, which could negatively impact AMD’s growth trajectory.
Recently, the Senate is considering a $50 billion note to boost US semiconductor production. This bill, if passed as is, will greatly benefit Intel, which is AMD’s main competitor, but not AMD. Companies like AMD and NVIDIA don’t make chips in the US, so they won’t be eligible for the grants. Therefore, changes in the political climate could impact the competitive landscape of the semiconductor industry.
AMD is benefiting from the boom in the semiconductor industry, and the use and demand for semiconductors will only increase in the future. AMD is doing well and several segments are showing higher growth rates than the industry as a whole. The acquisition of Xilinx is a great decision and I am delighted to see their growth in the robotics segment. Overall, I expect 25-30% growth in the long term.
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