Advanced Micro Devices Inc (AMD, Financial) has recently experienced a daily gain of 3.06%, despite a 3-month loss of -8.26%. With a reported Loss Per Share of 0.02, the stock appears to be modestly undervalued. This article delves into the valuation analysis, offering an in-depth understanding of AMD's intrinsic value.
A Snapshot of Advanced Micro Devices
Advanced Micro Devices designs a variety of digital semiconductors for markets such as PCs, gaming consoles, data centers, industrial, and automotive applications, among others. Its traditional strength lies in central processing units (CPUs) and graphics processing units (GPUs), used in PCs and data centers. Additionally, AMD supplies the chips found in prominent game consoles such as the Sony PlayStation and Microsoft Xbox. In 2022, the firm acquired field-programmable gate array (FPGA) leader Xilinx to diversify its business and augment its opportunities in key end markets such as the data center and automotive.
Understanding AMD's GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. It is calculated based on historical multiples, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
With its current price of $101.07 per share, Advanced Micro Devices has a market cap of $163.30 billion, making the stock modestly undervalued. As such, the long-term return of its stock is likely to be higher than its business growth.
AMD's Financial Strength
Investing in companies with poor financial strength can lead to a higher risk of permanent loss of capital. Hence, understanding the financial strength of a company is crucial before deciding to buy its stock. Advanced Micro Devices has a cash-to-debt ratio of 2.2, which is better than 51.49% of 905 companies in the Semiconductors industry. GuruFocus ranks the overall financial strength of Advanced Micro Devices at 8 out of 10, which indicates that the financial strength of Advanced Micro Devices is strong.
Profitability and Growth of AMD
Investing in profitable companies, especially those with consistent profitability over a long term, is less risky. Advanced Micro Devices has been profitable 5 times over the past 10 years. Over the past twelve months, the company had a revenue of $21.90 billion and a Loss Per Share of $0.02. Its operating margin is -1.73%, which ranks worse than 71.8% of 954 companies in the Semiconductors industry. Overall, the profitability of Advanced Micro Devices is ranked 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 88.77% of 873 companies in the Semiconductors industry. The 3-year average EBITDA growth rate is 76%, which ranks better than 90.85% of 776 companies in the Semiconductors industry.
ROIC Vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Advanced Micro Devices' ROIC is -0.08, and its cost of capital is 15.67.
In summary, the stock of Advanced Micro Devices is believed to be modestly undervalued. The company's financial condition is strong and its profitability is fair. Its growth ranks better than 90.85% of 776 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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