Advanced Micro Devices (AMD 4.78%) has turned into one of the more notable tech comebacks. Under Lisa Su's leadership, the company has gone from the brink of bankruptcy to becoming a fast-growth chip stock. But can new investors still profit from AMD's success? Let's take a closer look at the company and its financials to learn more.
When Su took over the company, the decline of the PC had decimated it. AMD had become a penny stock and appeared headed for bankruptcy.
According to CNN Business, to stage a comeback, Su first decided to focus on industry niches where AMD could rise to No. 1 or No. 2. This led to a focus on graphics processing units (GPUs) and central processing units (CPUs).
Su also bought some time by speeding the so-called "tick-tock" development cycle. Developed by Intel (INTC 1.65%), the tick cycle involves manufacturing advancements, while the tock cycle emphasizes improving chip architecture. Intel alternates these cycles each year. However, AMD began to work on both simultaneously. Su told CNN Business that this approach involved "convincing" potential customers that it could work but ultimately won over doubters with its results.
AMD entered the GPU business when it bought ATI in 2006. However, it has only recently stepped up its game in competing with NVIDIA (NVDA 1.46%)
It initially focused on lower-end chips sold at lower prices. This helped it become the GPU of choice for Microsoft's Xbox and Sony's PlayStation lines of video game consoles.
By 2019, AMD had caught up or exceeded NVIDIA's performance, particularly with the release of its Radeon RX 5700 graphics card, according to Tom's Hardware -- all while maintaining lower pricing than its peer. Today, AMD has made gained control of about 23% of the market for stand-alone graphics cards, according to Wccftech.
In battling Intel, AMD has experienced even more success. AMD enlisted former employee Jim Keller to design a smaller, faster next-generation CPU that helped it catch up to and beat Intel, which continues to struggle in its efforts to make larger and less efficient designs. Intel doesn't expect to release a chip comparable to AMD's current best until at least 2022. Consequently, AMD now leads Intel 51%-49% in the desktop CPU market, according to Passmark Software. While Intel maintains a lead in the overall CPU market, AMD's share there has risen to 40%.
These successes have greatly benefited AMD's financials. In the latest fiscal year, revenue increased by 45% from year-ago levels to almost $9.8 billion. This helped company profits to rise by an astounding 630% year over year.
Slower growth in expenses such as research and development and selling, general, and administrative expenses allowed operating income to more than double. Additionally, an income tax benefit of more than $1.2 billion helped lift AMD's GAAP net income to almost $2.5 billion in 2020. Without the tax and other benefits, non-GAAP net income came in at just under $1.6 billion, still a 108% increase from 2019.
The company forecasts that revenue will rise 37% in 2021. While GAAP income may decline without the tax benefit, investors should probably factor out that one-time boost when calculating income gains. Not counting the tax benefit, I would expect another significant surge in net income in the coming year.
Both the results and the prospects for continued increases have helped take the stock higher by just under 90% over the last 12 months. AMD now trades at just under $90 per share -- astounding growth for a stock that sold for under $2 per share as late as 2016.
Nonetheless, this massive surge has made AMD stock more expensive. Although the income tax provision spiked profits, AMD sells for just under 45 times earnings. If company forecasts for 2021 prove accurate, this valuation will probably not fall in the foreseeable future. However, its multiple comes in well below NVIDIA's P/E ratio of around 90. Also, if non-GAAP income growth can exceed the forecasted revenue increase, the current P/E ratio is probably a reasonable valuation for AMD stock.
Where AMD goes from here
Despite this multiple, AMD's focus on core competencies continue to foster competitive advantages and earn returns for its stockholders. Over the next year, AMD should prosper between its GPU niches and its technical lead over Intel in CPUs. I would not necessarily predict that AMD stock can double once again in 2021. However, given the expected revenue increases, AMD's growth story will likely not end anytime soon.