Advancing with Advanced Micro Devices

Apart from buying Intel last month, I also bought Advanced Micro Devices at $81.80 per share.  At that time, I looked into 6 different semiconductor stocks, and based on PE ranking, they were:

1. Intel (PE: 8.9)

2. Micron (PE: 21.99)

3. Taiwan Semiconductor (PE: 27.57)

4. Qualcomm (PE: 48.91)

5. Nvidia (PE: 93.53)

6. Advanced Micro Devices (AMD) (PE: 156.2)

INDUSTRY PE RATIO: 35.6

After a quick preliminary assessment, my attention was drawn to Intel, Taiwan Semiconductor, and AMD.  In the end, I bought Intel (https://mypecunia2020.home.blog/2020/08/27/buying-the-dip-intel-corporation/) and also AMD.  If I had the money, I would invest in all three, plus Nvidia. 

Introduction

Advanced Micro Devices, headquartered in Santa Clara, CA, is a global semiconductor company. The company operates in two segments, Computing and Graphics; and Enterprise, Embedded and Semi-Custom.  AMD’s market cap is $96.91billion for 3 September (for comparison, Intel’s market cap is $214.31 billion).

The Computing and Graphics segment includes desktop and notebook processors and chipsets, discrete and integrated graphics processing units, data centre and professional GPUs and development services. 

The Enterprise, Embedded and Semi-Custom segment includes server and embedded processors, semi-custom System-on-Chip products, development services and technology for game consoles.

Results and Ratios

In its most recent report (2nd quarter report), AMD reported the following:

1. Gross Revenue: UP 26% YoY.  $1.93 billion (2020) vs $1.53 billion (2019). The YoY increase in revenue was primarily driven by Ryzen and EPYC processor sales. 

2. Net Profit: UP 348% YoY.  $157million (2020) vs $35 million (2019).  However based on quarter to quarter result, 2nd quarter net income was down 3% from 1st quarter net income.

3. EPS Growth: UP 125% YoY.  $0.13 (2020) vs $0.03 (2019).

4. Cash Flow: Since AMD is basically a growth company, much of its cash flow as a whole is devoted to growing the company.  It has maintained positive cash flow balances for the past 5 years [$1.47 billion (FY2019), $1.08 billion (FY2018), $1.18 billion (FY2017), $1.26 billion (FY2016), $0.79 billion (FY2015)].  As at the end of the 2nd quarter, AMD’s cash and cash equivalents were $1.78 billion.  With a positive cash flow, AMD is set up to explore and invest in areas of growth and expansion.  AMD does not pay dividends.

5. ROE: 21.47% this quarter vs average ROE 15.37% (FY2019) and average ROE 29.32% (FY2018) [my criteria: above 15%].

6. ROA: 10.27% this quarter vs average ROA 5.18% (FY2019) and average ROA 5.95% (FY2018) [my criteria: above 5%].

7. Current Ratio (MRQ): 2.1 (my criteria: 2 and/or above).

8. Quick Ratio (MRQ): 1.56 (my criteria: 1 and/or above).

9. PB Value (MRQ): 29.32, so AMD is clearly overvalued.  The market definitely has the appetite for superior growth in tech stocks, AMD being one of them.  The world will have more, and not less of technology, both now and in the future.  So why not capitalise on this sector of multi-generations of growth by owning a semiconductor company?  All these new innovations in AI, autonomous driving and the like, require a chip to materialise.  AMD appears expensive now, but expensive can get more expensive.  I bought at $81.80. Anyway, I would be most comfortable buying more of AMD between $58.20 and $70.89.  

Why did I buy AMD?

1. A business with growing market share

On the day (July 23) that Intel, one of AMD’s competitors, announced that its next generation 7-nanometer manufacturing process was going to be delayed, and might have to rely on a third-party manufacturing experts and facility, AMD’s share price gained about 16% ($69.40 from $59.57). It was speculated that with this delay by Intel, AMD would capture 30% of the server market over the next 3 years and 50% over the next 5 years.

AMD’s share price rose higher on July 27, when it released its stellar 2nd quarter result (as reported above). AMD’s spectacular revenue growth for its 2nd quarter was fuelled by record notebook and server processor sales (Ryzen and EPYC processors revenue more than doubled from a year ago).  

Apart from the Ryzen and EPYC processors, made for desktops/notebooks and servers respectively, AMD also boasts of a few other products such as the Threadripper chips for high-end desktops and Radeon processors for graphics processing.  Based on its 2nd quarter performance, AMD now expects revenue for FY 2020 to grow by approximately 32 percent compared to 2019 driven by strength in its PC, gaming and data centre products. 

Who are AMD’s main customers?

Some users of EYPC processors: 

1. Google (Confidential Virtual Machines for Google Compute Engine)

2. Amazon Web Services

3. Oracle (Cloud Infrastructure Compute E3 platform)

4. IBM Cloud

5. Dell Technologies

6. Nvidia (DGX A100 system AI workloads)

Some users of Ryzen processors:

1. Lenovo (ThinkStation P620)

2. Hewlett Packard (Laptop & Notebook)

3. Apple (16-inch MacBook Pro)

My main reason to purchase AMD’s shares, in spite of its high valuation, was the many demand catalysts on the horizon for AMD.  The fundamentals supporting AMD will get even better in the near future … revenues will keep expanding, profits will keep charging higher, and AMD shares will keep rallying (I hope, of course).

2. Punching above its weight in spite of strong competition

AMD competes with Intel in the CPU space, and with Nvidia in the GPU arena.  AMD’s Ryzen chip offers a better value than Intel’s processors, although there are some other aspects where Intel’s chips come in stronger. AMD’s EYPC processors has made great gains against Intel in the server market.

In the GPU space, AMD’s Radeon processors are emerging as a strong challenger to Nvidia’s products.  In terms of speed, performance, efficiency, and the underlying technology, Nvidia is still in the lead as the GPU champion of the world.  However when it comes to price, especially in the mid-range market, AMD is a better value proposition.

In the technological race, AMD, firing on all cylinders, has been gaining grounds in recent years.  In terms of net income (MRQ), AMD is still not a match for Intel and/or Nvidia, especially when compared to Intel. 

Intel : 5.105 billion

Nvidia : 0.622 billion

AMD : 0.157 billion

However, AMD has tremendous potential to grow further for there is a lot of money to be made within the semiconductor industry.   That AMD has made some technological leads in some areas over both Intel and Nvidia is a fact that cannot be ignored.  As AMD is still a much smaller company (than both Intel and Nvidia), its growth is still in its initial stage … its growth story may have barely just begun.

Conclusion

While I think well of AMD, I have one concern though … and this concern applies to all semiconductor stocks.  I’m talking about the deteriorating US-China trade relations.  Semiconductor companies generate a significant portion of their revenue from selling their products to China.  Hence, the outlook for semiconductors is hugely dependent on a healthy US-China trade relationship.  

AMD does not break down its sales by country in its reports.  Goldman Sachs* estimated way back in 2018 that around 26% of AMD’s annual revenue comes from China (Intel: 40%, Nvidia: 56%).  Is AMD doing more or less sales with China than 2 years ago?  I don’t know as I don’t have the data to back it up.  No matter what, any imposition of tariffs or restrictions on sales will hurt a tech company such as AMD that derives part of its revenue from China, the awakened giant of Asia.

For now, in spite of the U.S.-China Tech Cold War, I am inclined to think that AMD’s strength is likely to continue and its stock, although overvalued, is well-positioned within a broader uptrend. 

* https://www.cnbc.com/2018/03/14/avoid-these-20-china-exposed-stocks–including-apple–if-trump-sparks-trade-war.html

Posted in AMD

2 thoughts on “Advancing with Advanced Micro Devices

    1. You’ve got a point there. Hence I invested a higher % in Intel, and a significantly smaller portion in AMD. But AMD does have a lot of potential and room for growth. Going forward, should the price drop, I plan on loading more.

      Like

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