Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is √(22.5 * 5 year average earnings per share * book value per share), which for Advanced Micro Devices gives us a fair price of $25.66. In comparison, the stock’s market price is $103.36 per share. Therefore, Advanced Micro Devices’s market price exceeds the upper bound that a prudent investor would pay for its shares by 302.8%.
The Graham number is often used in isolation, but in fact it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of The Intelligent Investor. The analysis requires us to look at the following fundamentals of Advanced Micro Devices:
Sales Revenue Should Be No Less Than $500 million
For Advanced Micro Devices, average sales revenue over the last 6 years has been $14.56 Billion, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was $100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.
Current Assets Should Be at Least Twice Current Liabilities
We calculate Advanced Micro Devices's current ratio by dividing its total current assets of $15.02 Billion by its total current liabilities of $6.37 Billion. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. In Advanced Micro Devices’s case, current assets outweigh current liabilities by a factor of 2.4.
The Company’s Long-term Debt Should Not Exceed its Net Current Assets
This means that its ratio of debt to net current assets should be 1 or less. Since Advanced Micro Devices’s debt ratio is 1.1, the company has too much debt. We calculate Advanced Micro Devices’s debt to net current assets ratio by dividing its total long term of debt of $2.47 Billion by its current assets minus total liabilities of $12.83 Billion.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years
Advanced Micro Devices had negative retained earnings in 2019, 2020, and 2021 with an average of $-5645357142.857142. Retained earnings are the sum of the current and previous reporting periods' net asset amounts, minus all dividend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years
We have no record of Advanced Micro Devices offering a regular dividend within the last twenty years.
A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years
To determine Advanced Micro Devices's EPS growth over time, we will average out its EPS for 2008, 2009, and 2010, which were $-5.15, $0.45, and $0.50 respectively. This gives us an average of $-1.40 for the period of 2008 to 2010. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $1.45, $2.57, and $0.84, for an average of $1.62. Now we see that Advanced Micro Devices's EPS growth was 215.71% during this period, which satisfies Ben Graham's requirement.
It may be trading far above its fair value, but Advanced Micro Devices actually does not have the profile of a defensive stock according to Benjamin Graham's criteria because it has:
- impressive sales revenue
- an excellent current ratio
- too much debt
- negative retained earnings in 2019, 2020, and 2021
- no dividend record
- EPS growth in excess of Graham's requirements
