AMD: Right On Target
Summary
- AMD updated their long-term financial targets at Financial Analyst Day 2020 to levels supportive of higher stock prices.
- The company guided to >20% revenue growth and 25% operating margins eliminating a long-held investor view of limited profits.
- The conservative outlook is for 2023 revenues of $15.0 billion and 2024 revenues at $18.0 billion suggesting revenues doubling from 2020 levels.
- My long-term model has an $18.75 billion revenue target (25% market share) and a $3.72 EPS.
- This idea was discussed in more depth with members of my private investing community, DIY Value Investing. Get started today »
On March 5, Advanced Micro Devices (NASDAQ:AMD) held their Financial Analyst Day for 2020. Despite the DJIA dipping nearly 1,000 points on the day and the COVID-19 fears spreading around the globe, the management team stayed focused on the long term.
The chip company provided updates to their long-term financial models right on target with goals from previous research. My investment thesis remains very bullish on the stock not lasting below $50 for very long.
Image Source: AMD website
Long-Term Model Updated
As my last article discussed, AMD established a long-term model back in 2017 of improving profitability due to higher margins. The company had gone through a decade of limited profits so the management team wanted to establish a goal for generating sizable profits by 2020. The investment community needed to understand that the goal wasn't for the chip company to just take market share from Intel (INTC). At the time, the ultimate goal was to achieve an EPS of $0.75.
AMD calls this their new long-term financial model, but CEO Lisa Su further defined this as a 2023 model. The key here is pushing the concept of 20% revenue growth over the period and operating margins reaching the 25% range for a substantial boost to their EPS.
Source: AMD Financial Analyst Day 2020 CEO presentation
My financial model has constantly harped on the benefits of higher margins as revenues grew. Previously, AMD had very low gross margins in the 30% range and the ultimate goal is set to top 50%, as all the new 7nm chips have margins above this target.
The only issue with gross margins reaching the mid-50% range or closer to 60% obtained by chip competitors Intel and Nvidia (NVDA) is the semi-custom work with console makers. Those chip deals have lower gross margins, but similar operating margins due to less R&D spend for this business line.
A big part of the margin growth story comes from the data center segment. AMD is forecasting data center accelerating to 30% of total revenues, up from only 15% today. This revenue growth will contribute at least half of the gross margin expansion from the current 43% target to above 50%. The PC & gaming sectors are only forecast to grow mid-teens over the next four years. Clearly, the data center market will need to contribute the outsized growth numbers considering the sector already has the lowest market share and the potentially largest TAM discussed later.
The market is likely to start focusing on the operating margin target now assigned as mid-20%. My previous financial model doesn't appear very far off from these goals of AMD:
- Revenue = $18.75 billion
- Gross Margins @ 50% = $9.38 billion
- OpEx @ 22% = $4.13 billion
- Operating Income = $5.25 billion
- Taxes @ 15% = $0.79 billion
- EPS = $4.46 billion/1.2 billion shares = $3.72
The only change to my model is a reduction in the tax rate from ~20% to ~15%. The company confirmed an ~3% cash tax rate due to NOLs while the presumed long-term tax rate is 15% once these operating losses are burned out.
Source: AMD Financial Analyst Day 2020 CFO presentation
My goal has AMD reaching a $3.72 EPS using a 28% operating margin on sales of $18.75 billion. The only possible change to my model is a slightly higher gross margin offset by higher operating expenses. One can easily see AMD reaching 53% gross margins and spending 25% of revenue on operating expenses to keep the operating margins at 28%.
If the chip company sustains 20% revenue growth, AMD would hit the below levels based on an initial 2020 revenue target of $8.7 billion:
- 2020 - $8.7B
- 2021 - $10.44B
- 2022 - $12.53B
- 2023 - $15.03B
- 2024 - $18.04B
These numbers still appear very conservative considering the $73+ billion revenue base of chip giant Intel. Though investors will clearly be happy with a base case of 20% revenue growth for AMD, the company isn't even preventing Intel from growing their revenue base by several billion annually.
Based on this forecast, AMD tops sales of $18 billion in 2024. Another sign the forecast appears conservative for the company to take nearly five years to reach these revenue levels. By 2024, the market size should grow and leave the chip company actually below 25% market share.
Growing Addressable Market
Another big number from the presentation was an update to the TAM targets. AMD set the 2021 target at $79 billion based on a huge $35 billion market opportunity in data center. Previously, the data center segment was set at $29 billion and the PC market was $30 billion.
Source: AMD Financial Analyst Day 2020 CEO presentation
A key to these financial targets are that AMD expects Intel to approach the foundry technology lead of TSMC (TSM). Upside potential exists, if Intel doesn't actually complete the transition to 10nm or fail to move towards 7nm as AMD transitions to 5nm.
Source: AMD Financial Analyst Day 2020 CEO presentation
As long as AMD has the lead at their foundry partner, one has to assume the company is able to obtain market share goals in the 25% range. With a $79 billion TAM, sales should easily approach $20 billion on the chip company only obtaining 25% market shares.
The opportunity always remains for AMD topping these goals for revenues of $18 to $20 billion annually. The base case is for an EPS reaching $3.50 to $4.00 per share by 2024. At $48, the stock only trades at 12.9x the $3.72 target in my model.
Takeaway
The key investor takeaway is that the opportunity exists for AMD to reach these targets far in advance of 2024 considering the growing TAM. The stock will continue rallying as the chip company continues to trend in the right direction of substantial EPS growth over the years.
The company issued the right targets at their Financial Analyst Day 2020 to warrant the stock rallying when the COVID-19 fears subside. AMD remains a bargain below $50.
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This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.
Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
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Comments (126)
Of course it helps $INTC in the short term as well. Probably helps Intel more in the short run since $AMD has such small market share.
The lows in the market will occur before the US numbers levels off. Very possibly that Italy is the key.
AMD : Last chance to short below 50Would've been a cool call
"AMD: Right On Target"Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.???
It won't hold any further market dips, but will the market dip further? Testing the lows here. The WHO declaring a pandemic could be the bottom signal.
Ground airplanes for what?
To stop the spread of the virus from the 14B zoo!
This virus spreads out "without having the symptoms of being sick" or "without knowing already being carriers"!!!
let's say 20% for next 5 years
1.1
1.3
1.6
1.9
2.5or a total 7.3 dollar return on 45 investment in 5 yearsgive me 50 and I'll give you 20 back in 5 years and then make an excuse that my competitor crushed me and I am making a losswith me 50 will make you lose 30 dollarswith AMD you will lose 43 dollars
Why bother with your own invalid model when this article has the 2024 EPS at $3.72? It's only helpful if you use this model (provided by the company) or outline what is wrong with it.
The goal is >30%. The greater than sign is a huge difference.
SA isn't reading the comment stream. You probably need to lodge a complain with the Help & Support button in the upper right corner.
Yes, this is why my comment was to steer people towards focusing on the operating margins going forward.
Looks like the author has taken a very bullish position. What is your professional stance on the stock here?
Short term this thing could easily .. very easily crack $50. So much positive energy and perma bulls are behind this. At the same time, COVID is causing supply chain disruptions and quite a lot of fear in the market. Long term I like AMD. I'm not sure if I agree w/ some of the long term projections of AMD about dominating the world and I think Nvidia is going to slap the hell of them when they jump to 7nm but still.. really good long term stock. Eventually Intel will gets its game together but still. I like em.Disclosure: Long via $45 calls for June.
If not, why has the stock held up? It took an 8% collapse in the market to get $AMD from topping $50.
A stock with 20% growth doesn't trade at a 10 PE. In a bear market, maybe closer to 20 while a bull market would be up at 30+.
"The company guided to >20% " Originally it was 28%-30%. AMD is doing the same thing as last year. Started at 9% guided down to 5%, came in at 3.6% revenue growth
Didn't say last day. smh. The point was the next days/weeks.
Minus the CV (and now the OPEC squabble) stock should track back to the $59-60 range. Hopefully we've seen the near term low. Buy now for a potential 30% gain back to $59.
A price war is rather difficult with $INTC having to cut prices substantially just to match the TCO of $AMD. Intel can't afford to keep cutting margins.