Advanced Micro Devices (AMD) is a high-growth semiconductor company with industry tailwinds.
Due to its high valuation, I am only neutral on the stock at current prices. (See Insiders’ Hot Stocks on TipRanks)
AMD Generates Healthy Growth
AMD is a leading semiconductor company that operates with a fabless business model, which means that it designs chips that are then manufactured by foundries such as Taiwan Semiconductor (TSM).
This business model is very asset-light, which is why capital expenditures are generally low, which translates into a strong free cash flow conversion rate.
On the other hand, AMD does not capture as much value across the product chain compared to other companies that fabricate the chips themselves, and AMD is, to some degree, reliant on foundries such as Taiwan Semiconductor.
When these decide to hike their prices, as Taiwan Semiconductor has recently done, this can theoretically put pressure on AMD’s margins.
Due to a strong product lineup, AMD has been able to generate strong growth for both its revenue and its profits, over the last couple of years, and during the last couple of quarters.
Growing semiconductor demand around the globe is one factor that explains AMD’s compelling growth track record. The company also has benefited from market share gains, however, which allowed the company to grow at an above-average rate in segments such as Data Centers.
During the most recent quarter, AMD has managed to grow its revenue by 100% year-over-year, to $3.9 billion, easily beating analyst expectations.
This massive growth was possible thanks to a strong product lineup in AMD’s core segments: PCs, Data Centers, and Gaming. All of these markets did grow during the recent past thanks to COVID tailwinds, but that alone would not have been enough for AMD to double its revenue. Instead, market share gains in core segments did have an impact as well.
AMD also managed to grow its gross margin by 400 base points. This, coupled with better operating leverage (operating expenses for sales, administration, etc. declined relative to the company’s bottom line), allowed AMD to grow its GAAP net income by several hundred percentage points, to $710 million from $157 million during the previous year’s quarter.
The near-term outlook is quite positive as well, as AMD has guided for $4.1 billion in revenue for the third quarter, which pencils out to another sequential increase.
Still, with more revenue growth and some more margin tailwinds to be expected, Q3 should be another strong quarter for the company.
Shares Are A Little Expensive
At $106.45 per share, AMD has cooled off a bit over the last couple of months, as shares peaked at $122.49 in August.
Still, even at today’s share price, AMD is not trading at a low valuation at all. Based on current earnings per share estimates for this year, at $2.50, AMD is trading at 38.7x this year’s expected net profits. When we take a look at next year’s expected net profit of $3.07 per share, AMD looks a little less expensive, but can still not be described as cheap, as the 2022 earnings multiple stands at 34.7.
To some degree, this premium seems justified by AMD’s above-average growth, but it still is doubtful whether shares will trade at a valuation this high forever.
Wall Street’s Take
Turning to Wall Street, AMD has a Moderate Buy consensus rating, based on the 11 Buys, three Holds, and one Sell assigned in the past three months. At $116.21, the average AMD price target implies 9.2% upside potential.
Disclosure: At the time of publication, Jonathan Weber did hold a long position in Taiwan Semiconductor Manufacturing Company.
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