To The Moon

$Advanced Micro Devices(AMD)$

Last Friday marked the continuation of a rebound in the S&P 500. However, year-to-date, many companies remain in the red, with a significant number experiencing double-digit declines.

Focus on the Semiconductor Industry

Today, our focus is on the semiconductor industry, specifically AMD, while also touching on Nvidia. Both companies have seen double-digit declines at the start of 2025. Despite this, investor sentiment appears to be improving. While we are still in a phase of extreme fear, the market is beginning to recover, as reflected in recent stock market gains.

Now, turning to AMD—a company that has declined approximately 42% over the past year. Its 52-week low hovers around $95, and while it is still trading near that level, there has been a slight rebound, with the stock currently sitting at $116. Both Wall Street and Seeking Alpha have classified AMD as a "buy." Although its year-to-date performance has been weak, long-term shareholders have significantly outperformed the S&P 500, which has gained 3,806% over time.

Earning Overview

In today’s discussion, we will take a deeper look into AMD’s financials, assess its valuation, and examine the implications of Nvidia’s recent keynote, which could have a significant impact on the company. We will also share our perspective on whether AMD remains a good investment at its current price.

In its latest earnings report, Nvidia reported a 24% year-over-year revenue increase, with the majority of growth coming from its data center business, which surged by 69%. Additionally, gross margins improved by three percentage points, and operating margins rose by six percentage points. However, net income declined by approximately five percentage points.

Fundamental Analysis

Regarding Nvidia, the company anticipates strong double-digit earnings per share (EPS) growth over the next four quarters. Over the past year, Nvidia has consistently exceeded analyst expectations, maintaining a 100% track record. At $469 per share, Nvidia is currently trading at a forward price-to-earnings ratio of 22.3—only slightly above the sector median. Historically, however, the company has traded at an average multiple of 41.6, meaning it is currently priced at a 47% discount compared to its historical valuation, suggesting potential undervaluation.

AMD’s Latest Earnings and Market Reactions

AMD’s February earnings report resulted in a stock decline. This was largely due to disappointment over data center revenue, which grew 69% year-over-year. While this might seem like strong performance, analysts had higher expectations. Interestingly, AMD’s CEO, Lisa Su, recently stated that data center revenue is expected to grow at a rate of 60% per year until at least 2028, within a total addressable market of $500 billion.

Data Center Potential and Future Growth

Despite analyst concerns, AMD’s data center segment reported $3.9 billion in revenue, with operating income doubling compared to the same quarter last year. If AMD continues to expand its data center market share, it could drive long-term revenue growth, potentially returning to the strong performance levels seen over the past five years.

Is AMD’s Valuation Undervalued?

This raises the question of whether AMD’s valuation is being unfairly suppressed in line with the broader sector, despite its strong growth. AMD’s revenue has increased by 14% year-over-year, with forward-looking projections at 20%—well above the sector’s mid-single-digit growth. While AMD currently trades nearly 50% below its five-year average valuation, its revenue growth over the same period has been significantly higher, at 34% and 26%, respectively.

Guidance

Looking ahead, AMD’s EPS is expected to grow by 41% over the next three to five years, far exceeding the sector average of 15% and its own five-year average of 33%. While revenue growth has slowed compared to historical levels, profitability remains a strong point. AMD’s gross margin stands at 53%, surpassing both the sector average (50%) and its own five-year average (48%). However, net income has dipped to 6%, down from an average of 11.4% over the past five years, though still higher than the sector median of 4.1%.

Free Cash Flow

Additionally, AMD has significantly increased its cash flow from operations, generating $3 billion compared to a five-year average of $2.3 billion. This is also substantially higher than the sector’s average cash flow of $106 million.

AMD vs. S&P 500 Performance

Over the past decade, AMD has dramatically outperformed the S&P 500, with returns of 3,806% compared to the index’s 175%. This trend has continued over the past five years, with AMD up 167% versus the S&P’s 136%. However, in the past year, the S&P has outperformed AMD, despite both posting negative returns. The S&P declined by 3.5%, while AMD’s losses were more significant.

Risks and Challenges

Market Share Comparison: AMD vs. Nvidia

AMD’s declining market share in key segments is a growing concern. In 2024, AMD's estimated market share in the data center GPU segment stands at just 4.2%, while Nvidia dominates with a staggering 94%, and Intel holds 1.8%. This trend is particularly alarming as AMD's market share has steadily declined since 2017-2018. It is a key reason why analysts continue to downgrade the stock.

This recent underperformance has led to bearish sentiment among investors, with some even referring to AMD as "Advanced Money Destroyer." However, as the stock price declines, sentiment may be reaching a turning point.

Investor Sentiment and AMD’s Valuation

When AMD was trading at significantly higher levels, investors were optimistic about its future prospects. Now, the key question is whether it is the right time to be bullish or bearish on the stock.

AMD’s Strong Balance Sheet

One important factor to highlight is AMD’s solid balance sheet. Since 2019, its net debt to EBITDA has remained at zero, and this trend is expected to continue over the next year. This metric essentially indicates how many years AMD would need to pay off all its debt net of cash on hand—currently, the answer is virtually none. Companies with such strong financial positions are often considered ideal for long-term portfolios, and AMD appears to be one of them.

Cyclicality in AMD’s Performance

However, investors should be aware that AMD is a cyclical company. Some years, its sales growth is in the strong double digits, while in others, it experiences negative or low single-digit growth. This pattern is common in the semiconductor industry. In comparison, Nvidia has demonstrated stronger and more consistent top-line growth.

Return on Invested Capital (ROIC) Concerns

AMD’s cyclicality is also reflected in its return on invested capital (ROIC). Ideally, a company should have an ROIC of at least 10% to show effective capital allocation. Over the last three years, AMD’s ROIC has been in the low single digits. This could deter some investors or lead them to demand a higher margin of safety when valuing the stock.

Rapid Revenue Growth Despite Volatility

Despite its volatility, AMD has grown its revenue significantly—from $4 billion in 2015 to $26 billion in 2024. However, one concern is share dilution. Over the past decade, AMD has issued more shares, which reduces each shareholder’s stake in the company. For new investors, especially those who have seen AMD’s stock decline, this is a negative. However, long-term investors who have benefited from AMD’s significant price growth may not see dilution as a major issue.

Valuation

Now, looking at our discounted cash flow (DCF) model, we arrive at an AMD price target of $137, which implies a 28% upside from current levels. This valuation is based on a 25% year-over-year free cash flow growth rate. However, different scenarios yield varied outcomes:

• Bullish Case (30% growth rate) → Price target of $190, representing a 78% upside.

• Conservative Case (20% growth rate) → Price target of $98, implying an 8% downside.

Interestingly, AMD was recently trading near the $98 level, suggesting that current market pricing already factors in a 20-21% growth rate in free cash flows moving forward.

Margin of Safety (MOS) Considerations

In our investment approach, we incorporate a 10% margin of safety (MOS), focusing on companies with:

1. A strong competitive advantage (wide moat)

2. Robust financial metrics

3. Promising forward-looking data

For AMD, a buy zone would typically be around $110 based on a 20% MOS, while a more aggressive 25% MOS would suggest a fair entry price closer to $98. Wall Street’s average price target remains $148, translating to a 38% upside.

Analyst Downgrades and Market Outlook

Several major financial institutions have revised their outlook on AMD:

• HSBC issued a double downgrade, citing intense AI competition, reducing its price target to $110 and predicting a challenging road ahead.

• Bank of America downgraded AMD due to concerns over potential market share losses, although they still maintained a target of $155, representing a 50% increase from current levels.

• Goldman Sachs surprisingly listed AMD as a "negative" AI chip pick for 2025, cutting its revenue estimates for the year by double digits and lowering the price target to $129.

Despite these downgrades, AMD's stock has already dropped significantly year-to-date, meaning that even at the revised targets, there is still considerable upside potential.

Hedge Fund Interest in AMD

Notably, billionaire investor David Tepper of Appaloosa Management recently added AMD to his portfolio, purchasing approximately 65,000 shares. While AMD only represents 2.24% of his total holdings, many of his positions are in low single-digit percentages, making this a fairly notable buy.

Institutional and Insider Activity

Institutional ownership of AMD currently stands at 71%, with $19 billion worth of shares sold over the past year. However, institutions have also purchased a similar amount, indicating a neutral stance overall. Notably, in the most recent quarter, institutions sold more AMD shares than they bought, though this should not be blindly followed without independent analysis.

Insider Transactions and Market Signals

Insider transactions provide another perspective. While insiders own a small percentage of the company, recent activity shows a large amount of selling—$36 million worth over the past year. However, on February 7th, an AMD Executive Vice President purchased 4,600 shares worth approximately $500,000, which could be viewed as a bullish signal. As legendary investor Peter Lynch stated, insiders buy when they believe the stock price will go up.

Market sentiment

Nvidia’s Keynote and Market Outlook

Nvidia’s recent keynote highlighted a major industry shift, emphasizing that computing is at an inflection point. As Lisa Su previously mentioned, analysts now expect the data center market to reach $1 trillion by 2028. In 2024, Nvidia’s data center revenue has only captured a fraction of that opportunity, indicating significant potential for both Nvidia and AMD.

AI and Future Opportunities

Nvidia’s keynote also emphasized AI’s growing role across industries. Nvidia is positioning itself to capture as much of this market as possible. For AMD, the challenge will be how to strengthen its AI offerings and capitalize on this expanding sector.

Nvidia’s Increasing Demand and Roadmap

Nvidia has reported a significant surge in demand, particularly with the anticipated release of Blackwell Ultra in the second half of the year. Looking ahead, the company has already scheduled the launch of the Vera Rubin in late 2026, the Rubin Ultra in 2027, and even a roadmap extending to 2028 with the expected release of FMAN.

AMD’s Need for a Long-Term Vision

One area where AMD needs to provide more clarity is its long-term strategy. While Nvidia is proactively outlining its roadmap and future developments, AMD must articulate its expectations not just up to 2028 but beyond. Nvidia CEO Jensen Huang has emphasized that, in addition to data centers, robotics will be the next multi-trillion-dollar industry, reinforcing Nvidia’s expansive vision.

Conclusion

Let us know your thoughts—Is AMD a buy, hold, or sell? Do you believe Nvidia's dominance will continue, or does AMD have the potential to regain market share and compete more aggressively in the AI and data center sectors? If you're bullish on AMD's long-term growth and expect 30% free cash flow growth annually, you could be looking at a 40% margin of safety with significant upside.

Would you invest in Advanced Micro Devices, or do you see it as Advanced Money Destroyer? Drop your insights below!

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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