Semiconductors company Advanced Micro Devices stunned Wall Street today as it surged to $68.35, marking a 6.9% change compared to the S&P 500 and the Nasdaq indices, which logged 0.9% and 1.7% respectively. AMD is -24.78% below its average analyst target price of $90.87, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Advanced Micro Devices has underperfomed the S&P 500 by 34.9%, moving -51.5%.
Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. The companyis in the technology sector, which groups together a wide range of industries including consumer electronics, software, computer hardware, scientific instruments and IT services. Legendary investor Warren Buffet once stated that he would never invest in technology companies. Apple is now one of his largest holdings.
The risks inherent to the technology sector are clear, but investors simply cannot ignore the potential for strong returns. Even with the lessons learnt in the 2000 tech bubble, the market continues to highly value the promise of technological innovation and the ability for these companies to build and occupy new markets.
Advanced Micro Devices's trailing 12 month P/E ratio is 43.5, based on its trailing EPS of $1.57. The company has a forward P/E ratio of 18.7 according to its forward EPS of $3.65 -- which is an estimate of what its earnings will look like in the next quarter. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 26.5 as of third quarter of 2022. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on AMD's margins:
| Date Reported | Revenue ($ MM) | Cost of Revenue ($ MM) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 16,434 | 8,505 | 48.25 | 8.35 |
| 2020-12-31 | 9,763 | 5,416 | 44.53 | 4.51 |
| 2019-12-31 | 6,731 | 3,863 | 42.61 | n/a |
- Average gross margin: 45.1 %
- Average gross margin growth rate: 6.4 %
- Coefficient of variability (higher numbers indicating more instability): 6.4 %
We can see from the above that Advanced Micro Devices business is not strong and its stock is likely not suitable for conservative investors.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Advanced Micro Devices's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ MM) | Capital expenditures ($ MM) | Free Cash Flow ($ MM) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 3,521 | -301 | 3,220 | 314.41 |
| 2020-12-31 | 1,071 | -294 | 777 | 181.52 |
| 2019-12-31 | 493 | -217 | 276 | n/a |
- Average free cash flow: $1,424,333,333.30
- Average free cash flow growth rate: 248.0 %
- Coefficient of variability (the lower the better): 110.6 %
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, AMD is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the third quarter of 2022, the mean P/B ratio of the technology sector is 5.57, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Advanced Micro Devices's P/B ratio is 2.0, indicating that the market value of the company exceeds its equity book value but is still below the average P/B ratio of the Technology sector.
As of third quarter of 2022, Advanced Micro Devices is likely fairly valued because it has an inflated P/E ratio, a lower P/B ratio than its sector average, and an irregular stream of positive cash flows that are on an upwards course. The stock has strong growth indicators because of its operating margins with a positive growth rate, and an average PEG ratio. We hope this analysis will inspire you to do your own research into AMD's fundamental values -- especially their trends over time.
