A Rebounding AMD Is a Good Bet

AMD has started recovering with a strategy that incorporated restructuring and transformation under the leadership of CEO Rory Read. The recent quarter’s earnings are also an evidence of the success of the transformation strategy deployed by the company.

Apr 25, 2014 at 11:59PM

Semiconductor maker Advanced Micro Devices (NASDAQ:AMD) has been showing improved performance in the last few quarters. It was dominated by Intel (NASDAQ:INTC) in the past, and the declining PC industry was not helping its cause. The company's ongoing recovery is spurred by the transition from conventional PCs to semi-customs, dense servers, and professional graphics. All of these markets allow for future growth and present AMD with an opportunity to capitalize.

Revenue and EPS
The company posted revenue of $1.40 billion this quarter, which translates to a 12% decrease sequentially and a 28% increase on a year-over-year basis. The year-over-year figure is more relevant, as the nature of AMD's business is cyclical.


Source: Earnings press release

Revenue increased due to the custom chip business, which grew in the wake of Sony PlayStation 4 and Microsoft Xbox One sales. Discrete graphics also grew, due to the increasing popularity of AMD's R7 and R9 graphics cards. However, revenue growth was capped by the declining computing segment, due to negative growth in the PC market. The diagram bellows shows the changing mix of AMD's revenue and its declining reliance on the PC industry:


Figures from CFO commentary

AMD posted a net loss of $20 million, as opposed to a loss of $146 million in the same quarter last year. We can see in the graph below that earnings per share improving -- apart from cyclical changes, the trend is an upward one.


Data from Yahoo! Finance, earnings report and estimates

The above argument for revenue growth also holds true for EPS. The operating income of the graphics business fell to $91 million, from $121 million in the previous quarter, due to the cyclical nature of custom SoCs and a slight increase in operating expenses. The company has managed its operating expenses, but they are expected to increase and remain at $450 million per quarter going forward.


Data from CFO commentary

Overall, the revenue and EPS position of the company is improving on a year-over-year basis thanks to semi-custom growth, increased ASP of GPUs, and lower operating expenses in the computing segment. The company will experience growth in the future, as Sony and Microsoft are expected to sell approximately 5 million and 4 million units of their respective consoles in 2014. ARM-based dense servers also hold promise for AMD beyond 2015.

Cash and balance sheet position
The cash and cash equivalent balance, including marketable securities, stands at $982 million, compared to $1.2 billion in the adjacent quarter. A payment of approximately $200 million to Global Foundries caused the decline in cash and cash equivalents. However, the current ratio stands at 1.94 ,and the interest cover is also above 1, indicating that the company does not face any short-term liquidity problems. AMD got its long-term financing in order recently by reprofiling its near-term debt maturities. Overall, AMD's balance sheet position is satisfactory and the risk of bankruptcy is remote.


Cash and cash equivalent trend

Valuation and final thoughts
The valuation is derived by taking management's 2014 guidance and making projections based on IDC and Gartner data, using free-cash-flow methodology. Revenue and net income is as follows:


Assumptions for FCF calculations:

  • Standard capital asset pricing model assumptions.
  • Growth of 12% p.a. is assumed until 2018, based on IDC and Gartner sales projections. Growth of 4% is assumed in perpetuity.
  • Capital expenditures are assumed to grow at a compound annual rate of 5%.
  • It is assumed that the beta is correlated to the volatility of the business.

The price target reveals potential upside and is justified by AMD's strategy to focus on growth segments like custom SoCs and professional graphics. Note that the effect of dense servers is assumed to offset the PC decline, but barely. However, this is a prudent view, as dense servers will grow at a much faster pace amid cloud and data-center growth.

AMD is still transitioning away from its PC business. Its graphics segment is supporting the growing revenues, and the company is improving its quarterly performance. Consoles will continue to boost profits going forward. New design wins will further strengthen AMD's position. It seems to have a promising future.

3 stocks poised to be multi-baggers
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have found multi-bagger stocks time and again. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Muhammad Saeed has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers