Advanced Micro Devices Inc (AMD, Financial) recently experienced a daily gain of 3.79%, with an Earnings Per Share (EPS) of 0.23. This raises the question: is the stock modestly undervalued? In this article, we'll delve into a comprehensive valuation analysis to answer this question. Read on to discover more about AMD's financial standing and potential investment prospects.
Company Overview
Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries. The majority of its sales are in the personal computer and data center markets, via CPUs and GPUs. Additionally, the firm supplies the chips found in prominent game consoles such as the Sony PlayStation and Microsoft Xbox. AMD acquired graphics processor and chipset maker ATI in 2006 to improve its positioning in the PC food chain. In 2009, the firm spun out its manufacturing operations to form the foundry GlobalFoundries. In 2022, the firm acquired field-programmable gate array leader Xilinx to diversify its business and augment its opportunities in key end markets such as the data center and automotive.
Currently, the stock price stands at $113.49 per share, with a market cap of $182.8 billion. The GF Value, our estimate of the fair value, sits at $128.46, suggesting that Advanced Micro Devices (AMD, Financial) is modestly undervalued.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
Our analysis suggests that Advanced Micro Devices (AMD, Financial) is modestly undervalued. This implies that the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid this, an investor must review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. Advanced Micro Devices has a cash-to-debt ratio of 2.09, which ranks better than 51% of companies in the Semiconductors industry. The overall financial strength of Advanced Micro Devices is 8 out of 10, which indicates that the financial strength of Advanced Micro Devices is strong.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. Advanced Micro Devices has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $23.1 billion and Earnings Per Share (EPS) of $0.23. Its operating margin is 0.73%, which ranks worse than 70.99% of companies in the Semiconductors industry. Overall, GuruFocus ranks the profitability of Advanced Micro Devices at 7 out of 10, which indicates fair profitability.
Growth is probably the most important factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Advanced Micro Devices is 35.7%, which ranks better than 88.81% of companies in the Semiconductors industry. The 3-year average EBITDA growth rate is 76%, which ranks better than 90.51% of companies in the Semiconductors industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Advanced Micro Devices's ROIC was 0.7, while its WACC came in at 16.61.
Conclusion
Overall, Advanced Micro Devices (AMD, Financial) stock is believed to be modestly undervalued. The company's financial condition is strong, and its profitability is fair. Its growth ranks better than 90.51% of companies in the Semiconductors industry. To learn more about Advanced Micro Devices stock, you can check out its 30-Year Financials here.
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