On August 5, 2023, Advanced Micro Devices Inc (AMD, Financial) stock experienced a 2.36% gain, closing at a price of $115.82 per share. Despite posting a Loss Per Share of 0.02, the question arises: Is the stock fairly valued? In the following analysis, we delve into the company's valuation, financial strength, profitability, and growth prospects to provide an objective answer.
Company Overview
Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries, primarily servicing the personal computer and data center markets. In addition to supplying chips for prominent game consoles like the Sony PlayStation and Microsoft Xbox, the firm acquired graphics processor and chipset maker ATI in 2006 and field-programmable gate array leader Xilinx in 2022. These acquisitions have bolstered Advanced Micro Devices' positioning in the PC industry and diversified its business opportunities in key markets like data centers and automotive.
When comparing the stock price to the company's estimated fair value or GF Value of $119.61, Advanced Micro Devices (AMD, Financial) appears to be fairly valued.
Understanding the GF Value
The GF Value is a proprietary valuation method that provides an estimate of a stock's intrinsic value. This estimation is based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded.
- GuruFocus adjustment factor, based on the company's past performance and growth.
- Future estimates of the business performance.
The GF Value Line represents the fair value at which the stock should ideally trade. If the stock price is significantly above the GF Value Line, it is considered overvalued and its future return is likely to be poor. Conversely, if the price is significantly below the GF Value Line, the stock may be undervalued and its future return is likely to be higher.
Based on this analysis, Advanced Micro Devices' stock appears to be fairly valued at its current price of $115.82 per share. This suggests that the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength
Before investing in a company, it's crucial to assess its financial strength. Investing in companies with poor financial strength carries a higher risk of permanent loss. A company's cash-to-debt ratio and interest coverage can provide insightful data about its financial strength.
Advanced Micro Devices has a cash-to-debt ratio of 2.2, which ranks better than 52.21% of companies in the Semiconductors industry. Its overall financial strength score is 8 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies generally carries less risk, especially if the company has demonstrated consistent profitability over the long term. A company with high profit margins often offers better performance potential than a company with low profit margins.
Advanced Micro Devices has been profitable for 5 out of the past 10 years. In the past 12 months, the company generated revenues of $21.9 billion and posted a Loss Per Share of $0.02. Its operating margin of -1.73% ranks worse than 74.33% of companies in the Semiconductors industry. Overall, GuruFocus ranks Advanced Micro Devices' profitability as fair.
However, growth is a crucial factor in the valuation of a company. Faster-growing companies create more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Advanced Micro Devices is 35.7%, which ranks better than 88.82% of companies in the Semiconductors industry. Its 3-year average EBITDA growth rate is 76%, ranking better than 90.52% of companies in the Semiconductors industry.
ROIC vs. WACC
Comparing a company's Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC) can provide insights into its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the ROIC should be higher than the WACC. For the past 12 months, Advanced Micro Devices' ROIC is -0.08, and its WACC is 16.66.
Conclusion
In conclusion, Advanced Micro Devices' stock appears to be fairly valued. The company's financial condition is strong, its profitability is fair, and its growth ranks better than 90.52% 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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