(Advanced Micro Devices) (AMD)
Overview of the Company - Advanced Micro Devices (AMD) is a semiconductor company. AMD makes components that go into computers as that is a main part of their business model. AMD is a fairly large company with a $129 billion market cap.
Fundamental Analysis - As the world becomes more reliant on computers and technology in general, AMD will have massive demand. The increase in online gaming has aided them as well. Gaming computers have gained popularity and AMD is poised to benefit from this increased demand. The PC business is growing at a steady pace and AMD stands to profit from this as well.
How (AMD) Stacks Up to Competitors - AMD’s biggest competitor is NVIDIA (NVDA). They also make chips and processors that go into computers as a main part of their business model. The long standing rivalry between AMD and NVIDIA will be quite interesting in the coming years. We also will be comparing these two high growth companies, with more of a consumer staple in the semiconductor industry, Intel (INTC). NVDA has the largest market cap by far with over $530 billion dollars while Intel comes in at half of that, and AMD is by far the smallest in the group. AMD and Intel have similar profit margins while NVDA lags. However, AMD is a clear winner in return on equity and assets in the group. While AMD and NVIDIA have seen substantial quarterly revenue growth (yoy) Intel is just about flat, which is a worrying sign. AMD’s balance sheet continues to surprise as they have had monstrous earnings growth, almost twice as much as NVDA in the last year. While both have great cash to debt ratios, AMD’s is much higher as they have less than a billion in debt. Intel trades like the old staple in the group. With little growth over the last year, it still trades at over twice its book value and a 12 P/E. While this may seem low for a tech company, it is clear that Intel is a laggard in the group as revenue and earnings are flat over the last year while NVIDIA and AMD have more than doubled in this area.
Bull Case - AMD continues to compete with its larger rival, NVDA and takes market share, boasting its fabulous year over year earnings and revenue growth. AMD takes advantage of the fact that NVDA is trading at twice the multiple they are and have already had a monstrous run this year. AMD continues to bring incredible growth to their company and away from NVDA. Earnings growth and consolidation in their biggest competitor will permit AMD to showcase that they will be the winner of this group next year.
Bear Case - AMD certainly had an outstanding year and great recent quarter, but it is evident that this may be a unique situation. The rise in online gaming can be attributed to the stay at home working environment and the height of the pandemic. The fact that NVDA will always be breathing down their neck makes it clear that AMD has a steep road to climb. If AMD is not able to consistently deliver big EPS increases, it will not be long before the stock dips below $100 again.
Valuation and My Price Target - I believe that AMD is trading at a fair multiple now, so really the only way for capital appreciation is continuous earrings growth. After four massive quarters and beats on every single one, I think that AMD can average a quarterly EPS of $.85. This indicates that EPS will be around $3.4. Multiply that by their current P/E ratio and it will result in AMD trading at around $125 a year from now.
The Verdict - BUY HOLD SELL
Both NVIDIA and AMD have had great runs this year, but it is worth noting that NVDA has certainly had the best year out of all three, up 64% YTD! It is quite possible that we may see some consolidation after this great run. Intel is certainly not an option as it trades at a tech company valuation with consumer staples price movement. That leaves us with AMD. Although it gets a price target of $125 a year from now, investors may see onl;y see approximately a 16% return. 16% is not bad but the S&P can easily do that next year. Furthermore, investing in the S&P is a much safer option as AMD faces stiff competition from NVDA. I just dont think AMD is worth the risk of competing with NVDA. Regardless of their phenomenal year and sparkling balance sheet, I believe AMD is currently a HOLD.
*all data provided by yahoo finance and nasdaq.com