Advanced Micro Devices  [Ticker: AMD]


Introduction:

It is my belief that AMD’s enormous growth in stock price can mainly be attributed to pure, unfounded hype. I personally believe that the company is NOT worth anything near $14 let alone everyone’s target prices of $20+.

Most people lack a fundamental understanding of the company and refuse to see the writing on the wall due to the massive amount of popular attention the stock has generated over the years. I will refer to this as the “meme-stock effect”. Moreover, I do not think anyone involved in the stock has bothered to do a complete research on the company in order to come to their conclusions, instead choosing mindless articles written by sycophants.

This can be seen when, just a small while or so ago, an article was released that effectively said “INTEL ANNOUNCES DEAL WITH AMD” in their title. It drove share prices high despite the fact that there was no proof whatsoever to support such a statement.


Product Line:

  • Ryzen
  • Vega

These two products are the forefront of AMD’s lineup, making up the majority of their discussion and advertisement on a day to day basis. Lisa Su, CEO of AMD, also clearly believes that these two products will be where a significant increase in revenue shall appear.

“And so, we should see Ryzen doing very well in the high end as well as Vega and by nature, since both of those high end markets are markets that we don’t have significant presence today, there will be an opportunity to both gain share as well as increase attach rates in those markets.”

– Lisa T. Su

But it’s not just her, it’s also EVERYBODY ON PLANET EARTH that seems to believe this. Many articles constantly claim how AMD will be able to steal a massive percentage of the market from it’s competitors with this lineup, and while terrific to believe, we need to face the reality of what this even means.

Because…

20% IS NOT ENOUGH TO DRIVE SHARE PRICES UP

Yes, you heard me right. I do not believe that AMD securing 20% of the market place as their own would be enough to drive their corporation any further.

Why you ask?

BECAUSE CONTRARY TO POPULAR BELIEF, THEIR PROBLEM ISN’T IN THEIR PRODUCTS.


The Breakdown


AMD’s 2016 revenue for the year was roughly 4.3 billion, so that’s the number we’ll start with for this.

We’re also going to be insanely generous and afford them a 25% revenue growth per year for the next 10 years. Now keep in mind that this is insane. 25% revenue growth YoY for ten years off of TWO products goes beyond optimism and transcends into a new planar existence where everything is rainbows and unicorns, but we’ll give it to them anyways for this example.

To sweeten things further, we’ll hand them a weighted average cost of capital(WACC) of just 10%.

Even though Gurufocus hands them a WACC of 19%

Now, if you go to the bottom of this page you’ll see that their net free cash flow for 2016 was 13 million. So their FCF Yield is just about 0.3%. We’re going to use that number, mainly since the preceding years are all negative so using them would just exacerbate the problem instead of giving us any semblance of hope.

So here’s what we have…

  • Starting Revenue: 4.3 Billion
  • Annual Growth Rate: 25%
  • WACC: 10%
  • CF Yield: 0.3%

Here are the tabulated results…

YEAR20162017201820192020202120222023202420252026 
Revenue (Increasing 25% YoY)430053756719839910499131241640520506256333204140051
FCF yield %0.30.30.30.30.30.30.30.30.30.30.3
CF13162025313949627796120
Year Number012345678910
PV15171921242832364146
WACC1010101010101010101010
Discount Rate0.10.10.10.10.10.10.10.10.10.10.1
Terminal Value1530
DCF Totals
1315171921242832364146590
Current Market Value12000
Shares Outstanding 945
Total DCF869
Intrinsic Value0.92
Long Term Growth Rate0.02

A share value of $0.92.

That’s what you’re paying for today.

That’s the valuation of AMD as a company according to the discounted cash flow model.

Now, that may seem harrowing, but keep in mind you’re paying for shares of a company that only keeps $13 million out of a $4.3 BILLION revenue. Do you want another company that had a huge revenue but relatively garbage cash flow? Ciber Incorporated, and if you don’t know what happened to them…

They went bankrupt.

And remember that this is being generous~

We’re giving AMD a 25% revenue growth year after year, assuming that their products face basically NO opposition from Intel or Nvidia because they smash them out the water like everyone keeps saying they will. On top of that, we’re straight up DENYING REALITY by giving them a WACC of 10%.

Now I know many people may say that keeping the FCF so low is a crime in and of itself, and yes, it might. The assumption here is that if the Ryzen and Vega products are so high quality, that they will naturally come with higher margins.

So we’ll just increase the CF by 1000% to 3.

YEAR20162017201820192020202120222023202420252026 
Revenue (Increasing 25% YoY)430053756719839910499131241640520506256333204140051
FCF yield %33333333333
CF1291612022523153944926157699611202
Year Number012345678910
PV146167189215245278316359408463
WACC1010101010101010101010
Discount Rate0.10.10.10.10.10.10.10.10.10.10.1
Terminal Value15326
DCF Totals
1291461671892152452783163594084635909
Current Market Value12000
Shares Outstanding 945
Total DCF8695
Intrinsic Value9.2
Long Term Growth Rate0.02

Congratulations…

AMD is now worth $9.2 per share, still $3 full dollars short of relatively recent pricing.

So we just gave them the holy grail of generous advantages but they still couldn’t reach up to their current price.

  • 25% YoY Revenue Growth
  • FCF Yield 1000% higher than what it actually is, effective starting **THIS** year
  • WACC pulled out from the tenth dimension to defy our reality
  • Products that exist in some transcendental market where they face NO competition from products that come from the larger, more ingrained companies surrounding them.

I mean, look at this… AMD could pull an annual revenue of 40 BILLION by 2026 and still be worth nothing close to the other semiconductor companies. People need to stop looking at their products, because their products aren’t the main factors holding them back.

The core foundation of AMD is in jeopardy.


Arguments Against This Thesis

  1. FCF Yield remained static throughout the 10 years which is unreasonable…
    • A lot of people will probably tell me that AMD’s yield will grow as the product sales increase. I disagree. As of right now cost of revenue is the driving force behind the weak FCF Yield alongside R&D, not investment liabilities or SG&A, which makes it a harder problem to solve. AMD cannot increase prices all that easily like Nvidia or Intel can since their marketing niche is cheap costs. They may be able to achieve a small decrease in R&D in order to widen the yield percentage, but that could result in a lagging of product evolution. A static FCF Yield should not be an issue here in my opinion since I honestly do foresee it either remaining static or simply dropping into the negatives as the company has historically done.
  1. Long Term Growth Rate is way too small…
    • I assume this will be where most of the contentions will rise, as it always does in DCF models. So just to preface, while thinking up the LTGR, I kept in mind these factors as outline by Aaron Rotkowski and Evan Clough in their research paper regarding the estimation of LTGR
      • First, the analyst should be careful to match the selected growth rate and the inputs considered with the metric being measured—that is, cash flow.
        • As we have already shown the FCF Yield value as being either 0.3% or 3%, I believe having a LGTR of 2% is quite in line with this. Moreover, I do not believe that the general uptick of the data centers market will have the greatest effect on them since I foresee Nvidia and Intel capitalizing on said markets as they’ve already begun doing.
      • Second, the analyst should be careful to consider any and all appropriate (and not consider inappropriate) qualitative factors in the selection of the growth rate.
        • AMD has shown its lack of Enterprise marketing when compared to Intel and Nvidia. Its decision to go to OEM’s first instead of Enterprise consumers shows a distinct lack of consideration towards the rapidly growing market of data centers. It is widely considered that the within the semi-conductor industry, data centers will be the next largest growing market. This lack of capitalization on an important market shows poor management and a slim future outlook.
      • Third, the analyst should consider appropriate (and not consider inappropriate) quantitative factors in the selection of the growth rate.
        • AMD has a history of negative FCF Yields. It is not entirely unlikely that revenue actually drops at some point within this ten year time frame. As Rotkowski mentions in his paper; “as such, it is likely that the economic factors driving a company in the near past will continue to affect the company in the near future.” AMD’s most recent years all showed heavily negative cash flow values. I believe that the slight uptick is quite in line and does not represent a momentum switch of any sort, especially when one considers the fact that AMD still retained a negative net income despite the 13 million positive cash flow.
  1. DCF itself is not the most tenable way of evaluating the future value of a company…
    • I understand that DCF relies heavily upon each value being properly aligned and that the misrepresentation of a single one gives a completely different end result; however, I feel that I have very properly chosen my values given the information and the statistics available to me.

Disclaimer: I do not own any shares of AMD nor do I plan on opening any positions in the near future. I do not have any options as well. What is written here is solely my own opinion and I am receiving no compensation other than what I may receive from TickHounds.