AMD: Maybe Not The Best Long-Term Investment?

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AMD: Maybe Not The Best Long-Term Investment?

Seeking Alpha2023-09-06

When looking at the last decades, Advanced Micro Devices, Inc. was an unstable business with fluctuating margins and growing outstanding shares.However, AMD changed its business model during the last ...

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CSK88
·2023-09-06
Cool
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PandaEyes
·2023-09-06
Welp, not sure if I can keep to long term, I'm only looking at current and it's good.
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HENDERSON BALANCED \"A2\" (USD) ACC","LU0109392836.USD":"富兰克林科技股A","SG9999000418.SGD":"Aberdeen Standard Global Technology SGD"},"translate_title":"AMD：也许不是最好的长期投资？","themeId":"","isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{},"content_text":"When looking at the last decades, Advanced Micro Devices, Inc. was an unstable business with fluctuating margins and growing outstanding shares.However, AMD changed its business model during the last decade and is now a fabless, asset-light business with higher levels of stability and consistency.To be fairly valued, AMD has to grow its free cash flow at least 20% annually for the next decade, and the stock certainly does not seem like a bargain.sankai/iStock via Getty ImagesWhen looking for an industry that seems to be able to make investors rich right now and generate not only above-average but phenomenal returns, a few semiconductor companies come to mind. And one example is Advanced Micro Devices, Inc. (NASDAQ:AMD). When looking at the performance in the last ten years, AMD could not match the performance of Nvidia Corporation (NVDA), but both semiconductor companies clearly outperformed the S&P 500 (SP500).Data by YChartsBut we all know that past results are no guarantee for future returns, and just because a stock outperformed in the last ten years does not mean it will also be a good investment in the next ten years or that we are dealing with a high-quality company. After I have written about peers like Intel Corporation (INTC) and Nvidia, let's also analyze AMD to determine if it is a good investment.Business DescriptionAdvanced Micro Devices was founded in 1969 by Jerry Sanders along with seven of his former colleagues from Fairchild Semiconductor - the same company Gordon Moore worked for before he founded Intel one year earlier. Early products of AMD were memory chips and other components for computers. Later the company expanded into the microprocessor market and competed with Intel.Today, AMD is a global semiconductor company and has about 25,000 employees and is generating $23.6 billion in annual revenue (fiscal 2022). The company is primarily offering server microprocessors (CPUs), graphics processing units (GPUs) and data processing units (DPUs) as well as Adaptive System-on-Chip (SoC) products for data centers.In fiscal 2022, AMD could generate a net revenue of $23,601 million and the top line therefore increased 43.6% year-over-year from $16,434 million in fiscal 2021. Operating income however declined from $3,648 million in fiscal 2021 to $1,264 million in fiscal 2022 - resulting in a loss of 63.6% year-over-year. And finally, diluted earnings per share declined 67.3% year-over-year - from $2.57 in fiscal 2021 to $0.84 in fiscal 2022. The main reason for the decline were $2,100 million in amortization of acquisition-related intangibles, which had a negative effect on operating income and the bottom line.AMD Q4/22 PresentationAMD is reporting in four different segments:Data Center segment: This segment primarily includes server CPUs, GPUs, DPUs or Adaptive SoC products. When looking at the last quarterly results, this segment generated $1,321 million in revenue but had to report a year-over-year decline.Client segment: This segment primarily includes Desktop CPUs and Notebook CPUs as well as Chipsets and Commercial CPUs. In the first quarter of fiscal 2023, this segment generated a revenue of $998 million but compared to the same quarter last year ($2,152 million in revenue) this is a steep decline of 54% and the segment had to report an operating loss.Gaming segment: This segment includes different graphics products to use in various computing devices and entertainment platforms. In Q2/23, revenue declined 4.5% YoY to $1,581 million.Embedded segment: Products in this segment are primarily CPUs, GPUs, APUs and Adaptive SoC products used in automotive, industrial, medical, multimedia, aerospace or defense industry. In the second quarter of fiscal 2023, this segment generated a revenue of $1,459 million and compared to $1,257 million in the same quarter last year, this is an increase of 16%.AMD Q2/23 FactSheetUnstable Business Over The Last DecadesOver the last decades, it was always a battle between AMD and Intel over market shares and most of the time, Intel had a clear edge over AMD. Over the long run (since the early 1970s), Intel's stock outperformed AMD. Only since 2000, Intel struggled, and AMD could start to outperform its competitor. But when looking at AMD, the company is clearly lacking the stability and consistency I search for in my long-term investments.Data by YChartsHowever, we can also look only at the last few years and see AMD gaining market share since 2016 while Intel lost market shares. And when only looking at the results in the last five years, we see a very profitable company growing with a high pace. Since 2018, AMD could report a profit every single year and could grow revenue as well as operating income at a high pace (fiscal 2022 being an exception with operating income struggling).CPUs were the core product for AMD for a long time - it became the core product for the business in the 1980s. But AMD was going up against Intel and over several decades, Intel executed very well and was dominating the market (hard to imagine when looking at Intel today). And in the mid-2010s, Intel made a few mistakes and did suddenly not perform so great anymore, which was great news for AMD as the businesses started to gain market shares.PassMark SoftwareAMD changing its business model started probably in 2006 when AMD started to diversify and acquired ATI Technologies and, therefore, entered the market for GPUs. This led AMD also to compete with Nvidia - and AMD was stuck in second place once again after it already was second in its competition with Intel.And about a decade ago, AMD made the strategic decision to become a fabless business, which also had the consequence of AMD becoming an asset-light business. The chips of AMD are produced now by the Taiwan Semiconductor Company (TSM) and AMD does not invest in foundries anymore, which are extremely expensive. Intel, for example, is still producing its own chips, which is capital intensive, while Nvidia is another example for a fabless business.When looking at the long-term performance of AMD, it is difficult to make the argument for AMD being a great business. However, the last few years should make us more optimistic that AMD actually could change its business model for the better and we might see more stability and consistency in the coming years and decades. However, right now, it seems possible to argue in both ways. If you want to learn more about the history of AMD, you can listen to the Business Breakdowns episode on AMD.Constantly Increasing SharesThe missing consistency over the years is a huge problem, but we could argue that AMD changing its business model in the last decade might have resolved this problem. However, other problems remain, and these are still making me question if AMD is a good investment. One major problem is the constantly increasing number of outstanding shares. For a mature company - and with a market capitalization of currently around $180 billion, AMD is a mature company - I don't want to see increasing shares with a high pace. A mature company must be profitable and generate enough free cash flow to finance its operations in other ways.Data by YChartsAnd of course, it is not always possible to finance operations solely with the free cash flow a business is generating. Especially in case of acquisitions a company must take on debt or issue new shares to finance. And increasing the number of outstanding shares a few percentage points over a few years is also not the issue. AMD however increased the number of outstanding shares by 111% in the last ten years and that is a red flag for me. And when looking at AMD over the last few decades, we see constantly increasing outstanding shares - between the 1980s and today, AMD increased the number of outstanding shares by 14 times from about 110 million to 1,627 million today.Intrinsic Value CalculationWe can start by looking at simple valuation metrics and look at the P/E ratio for example. In a previous article about NVIDIA, I pointed out the extremely high valuation multiples the stock is trading for. And AMD is trading for an even higher valuation multiples - about 480 times earnings (at least when AMD reported positive earnings on a TTM basis last time). And when looking at competitors like Intel or Qualcomm Incorporated (QCOM), it might seem even more difficult to justify these P/E ratios.Data by YChartsOf course, it is not just enough to look at numbers, but also provide some context. AMD for example saw its earnings decline and when taking the expected earnings per share for the next four quarters, the stock would be trading around 40 times earnings. And the comparison to Intel is lagging as Intel is clearly struggling - with revenue declining steeply while AMD can grow at a high pace.We can also try to estimate what an intrinsic value for AMD could be by using a discount cash flow calculation. As always, we calculate with the current number of outstanding shares (1,627 million in case of AMD) and a discount rate of 10%. As basis for our calculation, we can take the free cash flow of the last four quarters with free cash flow (\"FCF\") being $2,407 million. This seems like a realistic basis for our calculation as it is a little lower than previous record FCF and is, therefore, taking into account lower FCF due to a recession for example.When assuming 6% growth till perpetuity in ten years from now (I never take higher numbers as we never know what will happen in 20 or 30 years from now), AMD must grow its free cash flow about 22% in the next 10 years to be fairly valued right now. In the last five years, AMD could grow revenue with a CAGR of 34.67% and operating income with a CAGR of 44.02% and, therefore, growth rates slightly above 20% seem realistic and achievable for AMD. On the other hand, we should not forget that AMD was struggling to be even profitable in many years of its existence, and from that point of view, constantly growing revenue with a high pace is an extremely optimistic assumption.AMD Financial Analyst Day 2022And AMD is quite optimistic that it can improve its long-term gross margins to above 57%. Right now, gross margin is only about 43% and, therefore, this would imply quite a lot upside potential in the years to come. Additionally, AMD is expecting revenue to grow long-term around 20%.AMD Financial Analyst Day 2022When combining revenue growth around 20% and improving margins over time, AMD could be able to grow with the necessary rates in the next ten years to be fairly valued right now (and at least till 2027, analysts are also expecting high growth rates).Long-term InvestmentAt this point one might point out that semiconductors are a cyclical industry and therefore the results are not surprising. But the final question remains: Is AMD a good long-term investment?On the one hand, we have a business growing with a high pace in the last few years and artificial intelligence could be a long-term tailwind for semiconductors. On the other hand, we have a business that is constantly increasing its number of outstanding shares, reported highly fluctuating numbers for most of its history and must grow its free cash flow at least 20% for the next ten years to be fairly valued. When trying to find an answer to the question if AMD is a good long-term investment, we must start looking if AMD has a wide economic moat around its business.I already showed above that AMD clearly outperformed the S&P 500 (SP500) over the last ten years. And when looking at the long-term picture over the last decades, AMD still outperformed clearly, and an investment in AMD generated 10 times the return an investment in the S&P 500 generated.Data by YChartsHowever, when looking at the performance over the last few decades, we also see that the performance of AMD was rather choppy. The impressive outperformance by itself is an indication for a wide economic moat. However, companies with a wide economic moat usually show stability and consistency over time - and AMD seems to be missing that consistency. When one had invested in AMD in the early 1970s and looking at the investment four decades later (for several years following 2010), AMD would have underperformed the S&P 500.I get that AMD is a semiconductor company and this is a cyclical business and demanding stability and consistency from these businesses is a tall order. When looking at the margins, we see a fluctuating gross margin over time (another hint for a cyclical business) and we see an operating margin that was often negative during the last few decades.Data by YChartsAnd when looking on return on invested capital the picture is similar. We see huge fluctuations between 62% ROIC and a negative ROIC of 48%. On average, return on invested capital was 0.34% since 1990 - and that is rather a disappointment. In the last five years, the average ROIC was 25.97%.Data by YChartsLooking at the last three years, AMD spent 20.3% of revenue on R&D in fiscal 2020, 17.3% of revenue in fiscal 2021, and 21.1% of revenue in fiscal 2022. While we can argue it is not great to have to spend so much money on R&D (as it is underlining the high investments necessary to keep performing at a high level) it is also demonstrating the high upfront costs necessary for competitors to enter the market and this is creating barriers to enter for new competitors.Additionally, we must mention the high number of patents AMD is owning which are intangible assets and are also creating a competitive advantage. In its fiscal 2022 Annual Report, AMD is writing:We rely on contracts and intellectual property rights to protect our products and technologies from unauthorized third-party copying and use. Intellectual property rights include copyrights, patents, patent applications, trademarks, trade secrets and mask work rights. As of December 31, 2022, we had approximately 8,200 patents in the United States and approximately 2,200 patent applications pending in the United States. In certain cases, we have filed corresponding applications in foreign jurisdictions. Including United States and foreign matters, we have approximately 19,800 patent matters worldwide consisting of approximately 13,200 issued patents and 6,600 patent applications pending.In my opinion, AMD can be seen as having an economic moat around its business, as it will most likely be able to keep competitors at bay and it will be difficult for new companies to enter the industry.ConclusionAMD might have a wide economic moat around its business and the business model might have improved during the last ten years. But although AMD might be able to report more stable numbers in the years to come (compared to past decades), I am still not convinced about AMD. To be honest, I see AMD in the third position - behind Intel and Nvidia. While Nvidia is performing exceptionally well, the stock price is way too high. AMD is not performing so great, but the stock price is still expensive. And the best pick in my opinion is Intel. The company is clearly lagging but trading for such cheap prices that the stock is the best investment right now.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[{"id":216938336456960,"gmtCreate":1693986672584,"gmtModify":1693986677679,"author":{"id":"3569730362364110","authorId":"3569730362364110","name":"CSK88","avatar":"https://static.tigerbbs.com/831855576c5b2d28ba9be7798d3c575e","vip":1,"crmLevel":3,"crmLevelSwitch":1},"htmlText":"Cool","listText":"Cool","text":"Cool","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/216938336456960","repostId":2365424052,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":216996442304640,"gmtCreate":1693985396490,"gmtModify":1693985402356,"author":{"id":"4099020730670950","authorId":"4099020730670950","name":"PandaEyes","avatar":"https://static.tigerbbs.com/a7bab6c039b2d7b334f21626cfada364","vip":1,"crmLevel":8,"crmLevelSwitch":1},"htmlText":"Welp, not sure if I can keep to long term, I'm only looking at current and it's good.","listText":"Welp, not sure if I can keep to long term, I'm only looking at current and it's good.","text":"Welp, not sure if I can keep to long term, I'm only looking at current and it's good.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/216996442304640","repostId":2365424052,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":8,"commentSize":0,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}