Company Overview

The existence of Advanced Micro Devices, Inc. (AMD) dates back to 1969 when it was incorporated in the state of Delaware, United States of America. The company went public about three years after its formation. Its shares are available for trading on the NASDAQ Global Select Market (NASDAQ). AMD is a semiconductor company that deals in microprocessors, graphics processors, and chipsets used in many electronic goods.

AMD has agreements with other companies for the manufacture of its products. One of those agreements is the one with Taiwan Semiconductor Manufacturing Company Limited and Global Foundries Inc. Global Foundries Inc was established by AMD in collaboration with Advanced Technology Investment Company LLC and West Coast Hitech L.P. in March 2009. In addition, AMD entrusts the assembly, testing and packaging of its products to a third party such as Tongfu Microelectronics Co. Limited.

Dr. Lisa Su is the chair and chief executive officer of AMD. Before joining AMD, Dr Lisa had served in different capacities such as Senior Vice president at Freescale Semiconductor Inc., Vice president at Semiconductor Research and Development Center (IBM), technical staff member at Texas Instrumenst Inc. John Caldwell, who had previoudluy served as the company’s chairman, was appointed lead director in 2022. Victor Peng, former chief executive officer of Xilinx, was appointed president of the Adaptive and Embedded Computing group, following the acquisition of Xilinx by AMD.

Investment Thesis

The performance of AMD in the past four years has shown that the company has overcome its recurring losses. It recorded positive net income for four successive years; and the accumulated deficit on its balance sheet has been declining in the last few years. Sustained cost control measures were partly responsible for improved profitability. Cost of sales to turnover ratio shed close to 25% over the past five years. Likewise, the total cost, which exceeded total revenue by 10.8 percent in 2016, dropped to 77.9% at the 2021 year-end. Over the past five years, operating profit margin has gained 30.9 percentage points while net income margin rose by 30.7%. Accumulated losses would be wiped off if profitability can be maintained. Shareholders’ wealth will also improve when the company makes profits.

AMD is positioning itself to be one of the major providers of next-generation/future technologies by acquiring Xilinx and Pensando Systems in 2022. It bought Xilinx to improve its adaptive computing capabilities. Apart from adaptive computing, Xilinx also provides Artificial Intelligence (AI) interference acceleration, computational storage, networking, video AI analytics and video transcoding to a variety of industries. The acquisition of Pensando Systems has broadened its data centre offerings and enabled it to take advantage of the growing demand for data centre and cloud computing services. The effort of the management to strengthen its competitiveness in its major markets of the US, China, Japan and Taiwan is plausible.

Research and Development (R&D) is a key success factor in this industry as technology is fast changing. The company’s spending on R&D has continued unabated; this should facilitate the introduction of innovative products in response to the growing demand for personal computers, workstations, game consoles, cloud computing, robotics, and artificial intelligence. AMD uses patents to protect its technology and inventions in order to keep competitors at bay.

Despite the inherent risks in it, digital transformation bodes well for AMD and investors in the company’s stock. We expect investors to buy at the right price.

Valuation

The fair value of a share of AMD is between $98.22 and $117.43 based on our estimation. A return of 27.2% is anticipated on the stock of AMD.

Financial Overview

Sales revenue from Computing & Graphics jumped by 45.1% to $9.3 billion at the end of the 2021 fiscal year. The Enterprise, Embedded and Semi-custom segment produced revenue of $7.1 billion or 43.2% of the total revenue of AMD. Computing & Graphics includes computer microprocessors (CPUs), chipsets, and Graphic processing Units (GPUs). Enterprise, Embedded and Semi-custom consists of server and embedded processors, semi-custom system-on-chip (SoC) products, development services and technology for game consoles. Altogether, AMD realised a total revenue of $16.4 billion in 2021, up by 68.3% over the prior fiscal year. An operating income of $3.6 billion was declared in the year under review as against $1.4 billion in the preceding year. Income before tax and income after tax were $3.7 billion and $3.2 billion, having gained 187.8% and 27% year-over-year, respectively.

Gross profit margin added 3.7% to close at 48.3% at year-end, owing a drop in the cost of sales to turnover ratio. Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) margin stood at 24.7% compared to the prior year’s 17.2%. Operating profit margin improved as revenue rose faster than operating expenses. Pretax income margin went up from 13.1% to 22.3% while post-tax income margin shrank to 19.2% from 25.5%. Return on average equity shed 10.7 percent while return on average assets lost 4.1% from 33.5% achieved a year ago.

Shareholders’ fund has grown consistently in the past six years inspite of the effect of the losses the company had accumulated. Shareholders’ fund swelled from $5.8 billion to $7.5 billion, thereby gaining 28.4% year-over-year. Accumulated deficit dropped $3.2 billion to stand at -$1.5 billion as at 25th December 2021. Debt has declined over the past three years and debt obligations have dropped; besides, there was enough profit to cover interest payments. AMD produced a free cash flow of $2.65 per share in the year under consideration compared to $0.66 in the previous year.

Business Risk

The products of AMD may pose health and environmental hazards in addition to the breach of privacy. The third parties that are contracted to manufacture its products are subject to regulations and environmental laws where they are domiciled. The operations of AMD can be disrupted if its suppliers fail to comply with relevant laws.
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Recommendation: Buy