AMD Stock (NASDAQ:AMD)
I consider the semiconductor industry to be cyclical due to the large lag time between noticing a gain in demand and being able to meet that rise in demand. This means that, like mining, shipping, and cannabis, chip manufacturing companies are likely to endure periodic oscillations between undervaluation and overvaluation.
I believe Advanced Micro Devices, Inc. (NASDAQ:AMD) will succeed in the long run, and am excited to become an investment, but only if I can do so at a reasonable price. I believe that the approaching recession will bring buying opportunities for manufacturers, including AMD. After reviewing their financials and valuation, I believe the company is still overvalued and that I should hold off on investing. AMD stock is a Hold for me.
Company History
AMD is a computer processor manufacturer headquartered in Santa Clara, California. Jerry Sanders launched the company in 1969. In 1981, AMD and Intel Corporation (NASDAQ:INTC) signed a 10-year technology exchange agreement in which each company agreed to become a second-source manufacturer of the other’s semiconductor devices. AMD split out its chip foundries in 2008, becoming a fabless semiconductor producer.
Recent Changes
Their most recent earnings call included a variety of company happenings. They report that revenue in their Data Center business was flat year over year, with increasing cloud sales offset by lower enterprise sales. In the first quarter, their AI efforts rose dramatically, owing to involvement with data centers and embedded customers.
They stated that interest in their next-generation Instinct MI300 GPUs has surged dramatically and that they are on pace to introduce them later this year to support the El Capitan Exascale supercomputer at Lawrence Livermore National Laboratory and large cloud AI customers.
Their client sector revenue fell 65% year on year to $739 million as they supplied much less than consumption in order to reduce downstream inventory. The Ryzen 7000 X3D series CPUs combine their Zen 4 core with 3D chipset packaging technology. Their 16-core Ryzen 9 7945HX CPU powered the first notebooks powered by their Dragon Range CPUs. They also increased production of their Zen 4-based Phoenix Ryzen 7040 series CPUs for ultrathin and gaming notebooks in the first quarter. According to them, these processors will match the need for more than 250 ultrathin gaming and commercial notebook designs that are slated to be released this year by Acer, Asus, Dell, HP, and Lenovo.
Their gaming division revenue fell 6% year on year to $1.8 billion, as higher semi-custom revenue was offset by lower gaming graphics sales. Semi-custom SoC revenue increased year on year as demand for high-end consoles remained robust.
In the first quarter, they experienced high sales of Radeon 7900 XTX GPUs, as well as enhanced channel sell-through of their Radeon 6000 and Radeon 7000 series GPUs.
Their embedded division grew revenue to a new high of $1.6 billion. They highlighted growing demand from industrial, vision and health care, test and emulation, communications, aerospace, defense, and automotive customers as driving this success.
Vitis AI was released to provide sophisticated visualization and AI capabilities to their medical clientele. They also introduced the Kria platform, which enables adaptive computing for the smart camera, and industrial, and machine vision applications.
In communications, they introduced Zynq RFSoC devices to help expedite 4G and 5G radio deployments, and they established their first telco solutions lab to evaluate end-to-end solutions based on AMD CPUs, adaptive SoCs, FPGAs, DPUs, and software.
Subaru has launched its AMD-based EyeSight 4 technology across its entire vehicle lineup. They also increased their embedded processor offering with the Ryzen 5000 and EPYC 9000 debuts.
Revenue is expected to be at $5.3 billion in the second quarter of 2023, plus or minus $300 million. This reflects a decline of nearly 19% year on year and is roughly flat sequentially. They anticipate that the increase in the Client and Data Center segments will be offset by a slight fall in the Gaming and Embedded segments. They also anticipate a non-GAAP gross margin of 50%, $1.6 billion in operating expenses, and a diluted share count of 1.62 billion shares. Management anticipates that revenue and operating margins would be similar to the previous quarters, but that operating expenses will fall to $1.6 billion.
Long-Term Patterns
Microprocessors are expected to grow at a 6.5% CAGR through 2033. Through 2029, the worldwide GPU market is predicted to grow at a CAGR of 21.2%. Until 2030, the worldwide artificial intelligence industry is predicted to grow at a CAGR of 38.1%.
Financials
The global chip shortage that occurred in 2020 was a big boon to AMD. Annual revenue was $6,731B in 2019 and is slowly increasing. Annual revenue is expected to reach $23,601 billion by 2022.
AMD’s gross margins fell, hitting a low of 27.06% in 2016 and rising to a peak of 51.06% in 2022. In 2015 and 2016, the company had negative net and operating margins, which gradually improved until 2021 before declining again in 2022.
Instead of repurchasing shares during the temporary tailwinds given by the semiconductor shortage, AMD expanded its share count. This signals to me that management feels the company is still in the early stages of its corporate life cycle.
AMD currently has very little debt. Since its high in 2014, its annual net interest expense has been decreasing.
Their entire equity has increased significantly. I’m used to seeing fairly steady equity curves, so this is tough for me to assess.
Their annual return on capital has been fairly closely correlated with their margins. It had a low of -36.16% in 2015, but by 2020, it had climbed to 39.1%. It decreased to 2.29% in 2022.
A check of their revenue on a quarterly basis reveals that it peaked in Q3 2022. Net and operational income began to fall after peaking two quarters earlier in Q4 2021. Over the last three quarters, EBITDA has been positive even though revenue and income have decreased. Both operational and net income was marginally negative in the most recent quarter.
Following their peak in Q4 2021, their operating and net margins began to decline. Gross margins peaked in the following quarter and have been falling since the first quarter of 2022.
The increase in share count was accompanied by a considerable increase in cash. While I don’t know what management’s intentions are, I believe we are in a recession and it is prudent for them to maintain a substantial quantity of cash on hand.
For the last five quarters, the annual return on capital has decreased. The company’s ability to earn money has decreased significantly.
Valuation
AMD has a market capitalization of $144.67B as of May 5th, 2023, and traded at $89.84 per share. The company’s forward P/E ratio is 161.66x, its forward PEG ratio is 1.15x, and its forward Price/Cash Flow ratio is 39.14x. Before I contemplate purchasing, I usually look for PEG values near 1x. P/E ratios should be less than 15x, and Price/Cash Flow ratios should be less than 10x. Given that their return on capital has been essentially non-existent for the last five quarters, I believe these measures indicate that the company is overvalued.
Risks
Because the bond market has been inverted for months and the Fed is still fighting its inflationary war, the current economic slowdown is likely to turn into a recession. This deflationary pressure may create an even greater reduction in demand than the industry is now experiencing.
Because of the chip shortage, numerous companies increased manufacturing. Taiwan Semiconductor Mfg. Co. Ltd. (NASDAQ:TSM), Nvidia (NASDAQ:NVDA), Intel, Alphabet (NASDAQ:GOOGL), Micron Technology, Inc. (NASDAQ:MU), and others compete with AMD.
Catalysts
With the company now under-producing in order to let the inventory in the distribution system make its way through it, the obvious catalyst to watch for here is the company ramping up production as inventory lowers.
The large time lag between detecting the need for extra manufacturing capacity and acquiring that capacity results in times of feast and famine. I predict that the chip scarcity in 2020 will not be the last. AMD is well-positioned to benefit in the event of future shortages.
Conclusions
If Advanced Micro Devices, Inc.’s management is correct in predicting that sales and operating margins would remain basically unchanged in the coming quarter, but operating expenses will fall to $1.6 billion, the company might report a net profit. The most recent quarter had operational expenses of $2.809B and a net income of -$139M. If all other statistics remain constant, decreasing operational expenses to $1.6B results in a little more than $1B of positive net income for the corporation.
AMD is being confronted with tremendous headwinds. While I do not believe the price is guaranteed to fall, I do believe it is likely. I’m mostly waiting for the current economic slowdown to turn into a full-fledged recession so that I can buy the drop on numerous manufacturing companies. When unemployment reaches its zenith, I will revisit the small list of manufacturers I have been following and buy the most promising ones. AMD stock is very likely to be one of the later purchases I make.
Featured Image: Freepik @ Stitch
