Raghav Gangatirkar: The Case for AMD
By: Dogs Of Dalal Street
Tags: Amd, Stocks, Investing

AMD (Advanced Micro Devices) is a long for years to come as semiconductors start to completely dominate our world. The basic niche of the company is selling computer parts like CPUs, microprocessors, motherboard chipsets, embedded graphics processors, and many others. As computers start to overtake our day to day tasks, AMD will be a key player in distributing the parts necessary for the globalized tech revolution. With the growing demand for computer parts and increased reliance on tech during the pandemic, the stock continues its bullish run from 2015 to the present day.

AMD began in 1969 by Walter Sanders, a former executive at Fairchild Semiconductor, which was recently acquired in 2016 by ON semiconductor. AMD released its first product in 1970 and had its IPO two years later. Throughout the 1970s and until 1986, they were a second source computer chip manufacturer. These chips were supplied to Intel, which produced microprocessors for IBM PCs. In 1996, AMD began branching out of the second source market, and in 2000, it introduced the Athlon processor, which could run the Microsoft Windows Operating System. With this release, AMD became the first company to produce a 1 gigahertz microprocessor, cementing itself as a serious player in the chip sector.

It’s safe to say that AMD has lived up to their potential since the 2000 tech bubble burst. Today, the tech giant has expanded beyond measure. They are not just second-source anymore; now regular consumers have access to their variety of products, which include computer processors, motherboards, and most recently, a GPU (graphics processing unit). Among their most successful items is the AMD Ryzen, a vast lineup of around 15 CPUs. The higher-powered CPUs appeal more to gamers while the lower end ones target average households and casual pc users. Included in the graphics processing unit lineup is the Radeon XT series, however, companies like NVIDIA hold the edge over AMD in this sector, as AMD specializes in CPUs. Overall, AMD has built a strong foundation and continues to be a mainstay company for gamers and computer enthusiasts alike.

However, the future for AMD will not be easy. AMD is stationed in a sector filled with juggernauts such as Intel, NVIDIA, and Qualcomm. These companies have also taken major strides during this pandemic, with NVIDIA acquiring microchip company ARM, finally entering into the CPU business and Intel rolling out its extremely powerful 10th gen processor series known as Ice Lake in the middle of the COVID-19 pandemic. It’s safe to say that for AMD to come on top in this heavily occupied sector, it will have to cause a serious market disruption with a new product or software announcement. With many new products and acquisitions speculated to be happening soon, there is a tremendous opportunity for AMD to gain separation over its other competitors and develop something completely revolutionary. There are two main things I will discuss here: the finances of AMD and current growth, and the future forecast for the company’s operations.

With that, let’s take a quick dive into AMD’s financials and compare them to some of AMD’s competitors.

Cash was decreasing from 2016 to 2018 until seeing an increase in 2019. However, if you look at the total debt for AMD, this starts to make sense.The debt was decreasing as well, and the most likely cause was that the company was using some of its cash to pay it off. On top of this other assets for AMD increased which increased its current ratio. More specifically non-current assets (long term investments) increased by 40% from 2018 to 2019, which is far above the previous 10% increase in long term assets. This signifies AMD’s commitment to their product and confidence in their ability as they reinvested into their core product. Overall, the cash to debt ratio in 2019 is beyond excellent, seeing a significant jump in cash from 2018, and seeing a gigantic plummet in total debt when compared to 2018. This ratio is definitely an eye-popping stat for skeptical investors. However, it must be noted that the total current liabilities have increased quite a bit since 2018. AMD has also seen constant growth in shareholder’s equity, which indicates that AMD had to raise more capital in order to tackle some larger ventures and in exchange for that they issued more common stock. This can dilute existing shareholders and it’ll probably continue to happen if AMD follows its current growth trajectory, which will require even more financing.

Above are the shares outstanding for the company (Macrotrends.net). Despite increasing equity financing recently, the stock has only gone up since as return on equity was sufficient to not scare away shareholders. This is an extremely good sign, as normally if the shares outstanding metric sees significant growth, the stock price becomes diluted because the additional amount of shares may decrease the overall value of the share for the other investors

Taking a quick look into AMD’s income statement, we can see that the revenue growth was gaining magnificent momentum until last year, where it plateaued. The same case is with net income; we saw substantial growth in net income from 2016–2018, however, the growth shrank after that. Clearly the largest growth and most prosperous period for the company was from 2017 to the start of 2019, where the revenue grew 28%, and not coincidentally, the stock rose 70% growth in the 2018 fiscal year (Forbes). EBITDA has also seen some good growth from 2017–2019. However, the drastic slowdown in growth might raise an eye to some investors. For example, the revenue grew 18% from 2017 to 2018 but grew a measly 3% the following year. This plateau is most evident in the EBITDA value. The EBITDA value rose 58% from 2017 to 2018 and slowed down to 13% growth from 2018 to 2019. This slowdown could be attributed to less inventory being sold in 2019 than in 2018, and the cyclical nature of the semiconductor industry. Regardless of revenues, AMD has consistently spent ⅔ of OpEx on R&D for its latest chipsets. This inherently makes it an unstable business, and the risk factors here are numerous (as they were with Nvidia which has also seen several swings in prices in the past). Regardless of this, fundamentals for the company still remain strong as CPU demand isn’t expected to go anywhere. That’s why despite the revenue growth slowing down in 2019, the share price continued to rocket, because the semiconductor industry has a certain pattern that didn’t phase any experienced investors. AMD is likely working on the next generation of chips that’ll continue to pull them up sales-wise.

Free Cash Flow

Gross Profit Margin

The Future

With better customer retention than Intel, and gaining in CPU market share from 28% to 32% between 2018 and 2019, AMD is solidifying its name in the semiconductor space for retail consumers. Eventually they hope to reach much larger markets in order to keep up with companies like Intel and Nvidia in this crowded space. AMD will have to take advantage of this upcoming AI revolution by investing into software. Nvidia has already capitalized on this and created SaaS solutions for self driving cars, a first step in cementing itself into the AI market. As AI will start to become more and more evident and used in big cities, the demand for these technologies will start to increase. AI will start becoming increasingly more complex, requiring better processing technologies to support the infrastructure. However, this AI revolution will not be (for the most part) centered in households and individual customers, but rather in cities and localities using AI to build so-called “smart cities”. AMD can use this to their advantage and strike deals with city government, providing them with computer processors and other hardware to make it happen. To do this, AMD will need to look outside the gaming market and develop a processor more suited to power enormous amounts of data, which can be used in building the smart city infrastructure. One current option AMD has is to tap into the quantum computing world. Investing tons of cash into research and development of a AMD quantum computer will benefit the company greatly and help them gain an edge over other competitors in the field. These quantum computers can work extremely fast and will ultimately be an x factor in the overall composition of the smart city. Either way, the road ahead for AMD is certainly an interesting one and should be paid attention to.