Jun 21, 2021
[10 min Read]
The hype around AMD is very understandable!
Currently, according to Utradea's Reddit Sentiment Scanner, $AMD - Advanced Micro Devices Inc. is the 12th most mentioned ticker today. However, does AMD live up to the hype given to it on Wall Street Bets, or is it overhyped and bound for a correction? This analysis was ultimately designed to inform current and potential investors about the pros and cons about AMD, and if it lives up to the hype given to it on Reddit. So without further ado…
AMD is a global semiconductor company that develops high-performance computing/visualization products to solve some of the world's toughest challenges. AMD has a wide variety of products that fall under the following categories:
COVID-19 has ravaged global supply chains causing shortages in many commodities such as lumber, toilet paper, hand sanitizer etc., however, one of the most impactful shortages as of late has been the microchip/semiconductor shortage.
The global semiconductor shortage has caused panic in several industries, but most notably in the automotive manufacturing industry. Many companies like Ford and GM have been forced to halt their production due to this shortage, foregoing hundreds of millions in lost revenue. Although some manufacturers (ie. Tesla) have been able to avoid this shortage, many plants in North America were forced to shut down temporarily, causing higher job loss in the automotive industry. However, the automotive industry is not the only segment of the population that Is struggling for semiconductors and chips.
Due to the recent spike in popularity of cryptocurrencies, many people have turned to mining as a source of income/passive income. However, in order to mine these currencies, miners need to purchase one, if not 100's of GPUs in order to start their mining operation. Just to give you an idea of how many GPUs are demanded by miners, it was estimated that in Q1 of 2021 alone, miners bought 700,000 GPU's, this increased demand has driven the average price for a GPU up 2.5-4x. These miners definitely played a role in the acceleration of the semiconductor shortage and the damaging of global semiconductor supply chains.
Additionally, some analysts believe that PC sales rose by a massive 18.1% due to the pandemic. This is because many people needed personal computers in order to work from home, participate in distance learning, and potentially just for leisure due to the pandemic's constraints on daily life. However, due to the increased demand for GPUs from the cryptocurrency miners, it became increasingly difficult for people to order their own personal PC's. This overall increase in demand from both consumers and miners caused computer and computer part prices to skyrocket, applying further pressure on global supply chains.
Due to the huge demand from these separate industries/populations, semiconductor and chip manufacturers like AMD are able to profit massively, while sustaining a large backlog of orders and sustained demand. This has been recognized in their stock price as their share price has increased by 57% over the past year. However, how long will this increased demand last for? And how much profit is still left on the table for these companies until this demand subsides? These 2 questions are very important for AMD investors as it will help us to find the potential upside that is still left in this investment.
In a recent market study, analysts have estimated that the global semiconductor industry is set to grow at a CAGR of 8.6% over the next 7 years (until 2028). This helps investors to recognize the lasting demand for these semiconductors, and that it may be worth holding for the long run. Furthermore, analysts are also forecasting the global GPU market to grow at a CAGR of 33.6% for the next 6 years (until 2027), this growth is huge and shows the large potential in an investment into AMD. Lastly, it is important to look at AMD's market share and how it is growing. Since Q2 of 2021, AMD was able to grow their market share by 5.9 percentage points, which is extremely good. If AMD is able to continue to grow their market share, in these quickly growing markets, it would hint at them being the best performer in the industry over the next 10 or so years. This is the main reason why people are so bullish on AMD, and why such an investment can be lucrative.
AMD has been approved for 4,200 patents in the USA and is in the application process for 1,000 more. Additionally, AMD has over 7,500 issued patents worldwide (3,300 outside of the USA), and is in the application process for 3,000 more patents (2,000 outside of the USA).
These patents help AMD to protect their products and technology from unauthorized third-party manufacturing (clones).
My comparable analysis requires 4 companies, in which I can compare AMD's financial ratios, to the ratios of their 4 biggest competitors.
The 4 closest competitors that I found were Intel, Nvidia, Marvell Technology, and Qualcomm.
I chose these 4 companies given their market caps, their operations, their geographies, and their business models.
I was able to find my optimistic WACC, through TrackTak's website and online DCF calculator. They estimated that AMD has a WACC of 8%, which I used in my bullish DCF model.
I was able to find this (pessimistic) WACC through a website called “Gurufocus”, in which they estimated AMD's WACC to be 11.9%
I calculated this optimistic CAGR by finding AMD's average EBIT growth rate over the past 3 years of operations. By doing this I arrived at an average annualized growth rate of 71.21%, which I used in my bullish DCF model.
I calculated this pessimistic CAGR by taking AMD's average revenue growth over the past 3 years, by doing this I arrived at an average annualized growth rate of 22.79%, which I used in my bearish DCF model.
Interest Expense Decrease Rate:
I was able to find this figure by taking AMD's yearly interest expense decrease over the past 3 years and average it to find an interest expense decrease rate of 28.01%.
I found AMD's effective tax rate to be 3% through their SEC 10-K filing.
In order to value AMD, I decided to undergo 3 comparable analyses, as well as 2 different DCF models. I did this in the hopes of achieving unbiased, well-rounded results, to show multiple cases (bullish, and bearish)
This DCF model was the more optimistic of the two, using the 1st WACC, and the 1st CAGR values found in the “valuation information” section above. Through conducting this DCF model I arrived at a fair value per share of AMD of $178.85, which would imply a price increase of 111.50%. The result that I achieved in my bullish DCF model is similar to that of the highest analyst price targets, which helps me to verify the accuracy of this DCF to some extent. However, this is still a very optimistic assumption, so I decided to undergo another DCF analysis to get the more bearish case.
This DCF model uses the bearish assumptions of the 2nd WACC, and the 2nd CAGR also found in the “valuation information” section above. This DCF arrived at a fair value of $16.50 per share of AMD, this would imply a price decrease of 80.49%. This DCF valuation is similar to the lowest valuation given to AMD by analysts, which helps me to verify that these numbers are accurate and represent the most bearish case. This is very bearish, so I decided to take the average valuation of the DCF models in order to get 1 all-encompassing, non-biased, DCF valuation.
Average DCF Valuation:
By taking the average of my two results achieved in my DCF models, I arrived at an average fair value of $97.67, which implies an upside of 15.50%, which is very reasonable, realistic, and achievable given the macro-outlook. This is similar to the average valuation given to AMD by several analysts, which once again, strengthens my belief that these numbers are accurate, and AMD has the potential to reach this target.
By comparing AMD's EV/EBITDA multiple to that of their competitors (listed above in the “competitors” section), I found AMD's fair value to be $67.40. If this were the case then the downside of this investment would be 20.29%, this would be a large downside given the potential that AMD has, so I decided to undergo further comparable to see if this valuation was consistent.
By comparing AMD's EV/Revenue multiple to that of their competitors, I arrived at a fair value of $105.74/share. If this was the case, then there would be an implied upside of 25.05%. This conflicts with the result achieved through the EV/EBITDA comparable, and implies that AMD is undervalued. I decided to undergo one last comparable to strengthen my bullish/bearish assumption of AMD.
By comparing AMD's P/E Ratio to that of their competitors, I arrived at a fair value of $91.79, which implies an upside of 8.55%. This implies that AMD is slightly undervalued but does not necessarily support my conviction if the comparable analyses imply a bullish or bearish case. As a result of this uncertainty, I decided to take the average result as achieve in each comparable, to get one final fair value.
By taking the average of the comparable analyses, I arrived at one final fair value of AMD of $88.31/share, which implies an upside of 4.44%. This signals that AMD is currently slightly undervalued and represents a good opportunity to enter into a position.