AMD: Better Than Intel, With The Financials To Prove It
- AMD has an impressive portfolio of assets. The company is quickly becoming a leading tech company, versus Intel.
- AMD has the potential to generate significant shareholder returns. The company is in a strong phase of growing both margins and revenue.
- AMD continues to maintain leadership over Intel, and I expect that to continue going forward.
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Advanced Micro Devices (NASDAQ:AMD) is one of the largest semiconductor companies, with a market capitalization of more than $60 billion. It has performed admirably well, despite the COVID-19 shutdown, managing to grow its business significantly. As we'll see throughout this article, in an increasingly technological world, AMD's unparalleled portfolio of assets makes it a great investment.
Advanced Micro Devices
AMD has managed to build its best portfolio of assets ever. That portfolio of assets will define the company's coming years.
AMD Products - AMD Investor Presentation
AMD's primary area of leadership comes in the CPU business, where Intel's struggles have made AMD increasingly competitive. Specifically, the company has recently released new desktop processors, along with mobile processor and Threadripper leadership. The company's EPYC business has continued to perform incredibly well.
Overall, AMD has continued to perform incredibly well, with its market share increasing from 4% to 14.6% of the x86 market over the past year. In server chips, the company has a 4.3% market share up 2.7% over the past year. Intel is currently focused on achieving market leadership and is expecting to achieve leadership by 2022.
Whether that happens remains to be seen, however, in the immediate term, AMD will continue to gain market share. Whether Intel achieves its new market share remains to be seen. However, the past isn't any guarantee of the future. More importantly, AMD works with Taiwan Semiconductor Manufacturing Company (TSM), one of the leading fabricators, with some of the best margins.
Advanced Micro Devices - Quarterly Results
AMD has focused on achieving its quarterly results and rewarding shareholders well.
AMD Earnings - AMD Investor Presentation
AMD saw its quarterly revenue increase by 40% YoY despite a 16% QoQ decline. That decline is because the 4Q is normally the biggest quarter of the year. The company has done a good job of managing various COVID-19 related disruptions and performing well despite the disruptions. More importantly, the company has achieved strong and consistently improving margins up 5% YoY.
Growing revenue and margins together is the perfect system to growing earnings.
There are some other important things worth noting. The company has improved cash, cash equivalents, and marketable securities to $1.4 billion, significantly increasing the company's financial position. The classic sign of a big tech company is a significant net cash position. Continued profitability improvements, combined with continued earnings, will help the company generate stronger returns.
Advanced Micro Devices - Earnings Potential
Specifically, let's take a look at the company's earnings potential as it continues to improve.
AMD 2020 Outlook - AMD Investor Presentation
Above, AMD has highlighted its 2Q 2020 and FY 2020 financial outlook. The company is expecting 25% YoY revenue growth and strong gross margins of 45% vs. roughly 42% in 2019. That significant revenue + gross margin growth, combined with the company's low tax rates from previous investments, means the potential for significantly higher profits.
Advanced Micro Devices - Outlook and Market Share
Let's look at the long-term potential for AMD.
AMD's earnings are expected to increase rapidly as a combination of both improving margins and growing revenue. The company's yearly earnings are expected to increase from a midpoint of ~$0.8/share in Dec. 20 to $1.75/share in 2022. That's more than doubling in EPS, that shows no signs of slowing down. Given the company's $52/share price, that's a P/E ratio of <30.
That's a solid P/E ratio for a company with its EPS expected to double in 2 years. Given the potential for continued earnings growth, AMD is actually quite undervalued at the current time. Given that companies continue to see the potential benefits of AMD's better CPUs, especially expanding tech companies, the company's market share and income could actually grow more.
Advanced Micro Devices - Risk
AMD's biggest risk is two-fold. The first is that significant R&D investment is required for the company to maintain its market position. The second is that, in a potential recession, customers might choose to put off their hardware investments.
Looking at the first risk, it's a significant but difficult to quantify risk. Specifically, AMD was once an even bigger company than it is today, before its most recent collapse. However, the company fell a few tech cycles behind, and it's spent the entire time since trying to catch up. Separately, the company has made an investment, through using TSM, to make sure it's always close to the latest node.
The second risk is tougher to qualify, as the 2008 recession put AMD in a much worse place versus its pre-crash peaks as the company fell behind. AMD has done good work to improve its portfolio, specifically, it now has a net cash position that it's focused on expanding. That'll help it support R&D expenses in a downturn. However, how well that works remains to be seen.
AMD is quickly becoming one of the most significant tech companies in the world. The company has continued to release new CPUs, a business in which it excels. Additionally, the company's quarterly designs highlight its continued outperformance. Specifically, the company is growing both its margins and increased its revenue, which together support strong earnings.
Going forward, AMD's outlook is incredibly promising. Analyst forecasts show that the company's EPS should more than double over the next 2 years, while moving the company's P/E ratio to <30. That improvement in EPS, along with continued growth, makes AMD an incredible long-term investment. I recommend taking any price declines to invest in AMD for the long term.
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