As an investor, you may be wondering if now is a good opportunity to pick up shares of semiconductor stock Advanced Micro Devices (AMD). Over the past several years, AMD has been one of the best-performing stocks thanks to incredible gains in competitive position versus peers like Intel and Nvidia, resulting in surging revenuess and earnings.
However, like many high-flying tech names, AMD‘s stock has crumbled in 2022 amidst the challenging macroeconomic environment and market rotation away from expensive growth names. The 60% decline from 2021 peaks surely hurts, but does it make AMD stock attractive for investors today?
This article will dive into AMD‘s business model, market positioning, financials, valuation and growth prospects to determine if its recent underperformance warrants consideration for long-term investors. Time to drop in and conduct due diligence on this leading computing semiconductor company!
What Does AMD Sell and Who Are Its Customers?
Founded in 1969 and headquartered in Santa Clara, California, Advanced Micro Devices specializes in designing and manufacturing semiconductor devices used for computing and visualization applications in a wide variety of end-markets.
Specifcally, AMD focuses its research, design and manufacturing efforts on:
- Central Processing Units (CPUs) – The "brains" of computers and servers, AMD makes CPU chips across personal computing, gaming, and most recently – data centers via their highly regarded Epyc server CPUs
- Graphics Processing Units (GPUs) – Specialized semiconductor devices used to process and display visual effects on monitors and screens, with growing use in AI/ML workloads
- Chipsets – Complementary system components to support memory, connectivity and specialized functionality in AMD‘s core CPUs and GPUs
Within the CPU and GPU semiconductor categories, AMD‘s product portfolio competes directly with leading incumbents like Intel and Nvidia to serve end-customers ranging from large cloud players like Amazon (AWS), Microsoft Azure, Baidu, and Google Cloud to PC manufacturers like Dell, HP, and Lenovo.
Gaming console makers Sony (Playstation) and Microsoft (XBox) also use AMD‘s custom APUs combining CPU and GPU functionality into single chips to power their latest gen platforms.
Thanks to its technology innovations delivering leading performance and efficiency with processor architectures like Zen (CPU) and RDNA (GPU), AMD has captured expanding market share from these traditional rivals.
How Has AMD Performed Recently Versus Competition?
Over the past 5 years, AMD has massively outgrown the overall semiconductor market by successfully attacking the competitive duopoly Intel and Nvidia enjoyed in the CPU and GPU categories respectively.
Several product generations using the new "Zen" architecture has enabled AMD to deliver performance leadership in critical computing workloads against Intel‘s aging offerings, translating to massive gains in client computing and data center market share as shown in the chart below:
| AMD Client CPU Share | 2017 | 2022E |
|---|---|---|
| Notebooks | 8% | 25% |
| Desktop | 15% | 30% |
Similarly, AMD‘s Radeon GPUs have narrowed the market share gap with arch-rival Nvidia based on competitively priced new offerings over the past several years:
| Discrete GPU Market Share | 2017 | 2022E |
|---|---|---|
| AMD Radeon | 20% | 35% |
| Nvidia GeForce | 80% | 65% |
Source: Jon Peddie Research
Thanks to sustained execution (and stumbles at Intel), AMD now commands over 25% market share in both the $60 billion+ client CPU market and around 35% share in the $30 billion discrete graphics chip market – nearly double from 5 years ago.
With more next-gen products set to launch on advanced manufacturing nodes, AMD could continue making headway against the slowed innovation cadences from the long-time incumbents.
Reviewing AMD‘s Strong Financial Growth Trajectory
AMD‘s growing competitive advantages have directly translated to massive financial outperformance relative to the industry over the past 5 years despite recent economic cross-currents:
- AMD’s revenues have nearly quadrupled from $5.3 billion in 2017 to over $23.5 billion projected for 2022 – compound annual growth rate of 32%
- Operating margins have expanded from mid-single digits to close to 35% today thanks to an increased mix of high margin products
- After years of losses, AMD became solidly profitable from 2018 onwards with eps doubling in 4 years to $4.34 in 2022 (estimate)
- AMD has augmented cash flows to fuel growth investments – free cash flow is expected to reach $3.5 billion in 2022, up from just $100 million in 2017!
To showcase their growth trajectory across key financial metrics over the 2017-2022E period, observe the following set of charts:
AMD Revenues in $Billion (Source: Company Filings)
AMD Operating Margins (Source: Company Filings)
AMD Earnings Per Share (Source: SeekingAlpha)
While the worsening macro situation has cooled momentum recently, AMD expects to deliver its 6th straight year of double digit revenue growth in 2022 while maintaining industry-leading profitability levels.
Financially, the company seems poised to weather the economic storms better than peers if demand slowdown persists thanks to the balance sheet flexibility. Time will tell!
Assessing AMD‘s Current Stock Valuation
As AMD revenues, earnings and cash flows rapidly expanded thanks to strong competitive positioning, its share price shot up to never seen before levels – peaking above $160 in late 2021 and valuing the company at over $200 billion.
However, amidst the 2022 stock market carnage that has hit high-multiple tech names, AMD shares have crashed nearly 60% from those peaks to around $72 today.
At current prices, AMD trades at a market cap of $115 billion – meaning the company lost over $100 billion in valuation this year alone!
With AMD expected to earn around $4.40 per share in 2023, its forward P/E multiple stands at about 17x presently.
Compared to the frothy >50x earnings multiple reached last year when growth hopes peaked, this seems like a much more reasonable valuation level reflective of AMD‘s slowed near-term growth.
In fact, AMD‘s forward P/E valuation hasn‘t been this "cheap" since way back in 2016-17 when the company was struggling to compete. Considering AMD‘s much improved competitive positioning and financial strength now, the risk/reward tradeoff for long-term investors looks compelling.
Especially since the stock trades at near its highest free cash flow yield in 10 years – signalling the potential value on offer for patient investors.
Bull and Bear Case Drivers on AMD‘s Stock
Like most stocks, there are credible bull and bear arguments to be made for AMD‘s future share price performance. Let‘s examine the key drivers underpinning each side of the debate:
Bull Case
- Secular tailwinds in high performance computing driving data center, AI/ML growth over the next decade
- Maintains technology leadership versus Intel/Nvidia in critical computing workloads
- Ryan invests heavily in R&D to extend competitive advantages
- Reasonable valuations considering solid profitability and cash flows
- Could be an opportunistic merger/buyout target from mega-caps
Bear Case
- Demand weakness in PCs/Gaming due to economic challenges
- Inventory glut might impact growth rates near-term
- Cut-throat competition from Intel (CPUs) and Nvidia (GPUs) limits ASPs and margins
- Execution risks in advanced next-gen chip designs
- Loss of key personnel could disrupt product momentum
On balance, the bull case seems more compelling, suggesting patient investors are likely to be rewarded for accumulating AMD stock at depressed levels – as long as you can stomach the near-term volatility swings.
Verdict: AMD is an Attractive Long-Term Investment Today
In summary, I believe AMD represents an attractive investment opportunity at today‘s prices for investors with 3-5 year time horizons. Despite economic storm clouds causing a gradual slowdown in growth, AMD sits in poll position competitively thanks to its technological edge.
The company has significantly strengthened its financial profile over the past 5 years as well – providing downside cushion in case of prolonged demand weakness.
Meanwhile, AMD‘s depressed valuation builds a solid margin of safety while you collect a near 3% dividend yield and wait for the next growth upcycle.
For enterprising investors, accumulating AMD stock systematically looks prudent today. In a few years, we could very well see the stock regain $100+ levels hit not too long ago as secular demand drivers reassert themselves.
