Advanced Micro Devices, Inc. (AMD) Stock Doesn’t Stack Up

Advertisement

AMD stock - Advanced Micro Devices, Inc. (AMD) Stock Doesn’t Stack Up

Source: Shutterstock

In February, I advised against buying Advanced Micro Devices, Inc. (NASDAQ:AMD). I noted that AMD stock seemed overvalued and too hot, and instead recommended Intel Corporation (NASDAQ:INTC).

Advanced Micro Devices, Inc. (AMD) Stock Still Isn't My Cup of Tea

Source: Shutterstock

In the following weeks, AMD soared 27%, making me look foolish … but then, Advanced Micro reported its first-quarter results in May. The company provided merely in-line results, while gross margins declined from 34% in the prior quarter to 33%. That sent AMD shares reeling by roughly 20% in a snap.

At that point, AMD was off by about 15% from my article, while Intel was roughly flat. At the moment, both chipmakers are sitting at slightly under breakeven.

Everything’s about timing, I suppose.

But my opinion now is the same as it was then: I still don’t see AMD stock as a compelling buy, and still recommend established chipmakers like Intel and Qualcomm, Inc. (NASDAQ:QCOM) if you’re looking for value, or Broadcom Ltd (NASDAQ:AVGO) if you want growth.

Using data from Google Finance, I compared Advanced Micro Devices with four other chipmakers: Qualcomm, Broadcom, Intel and Nvidia Corporation (NASDAQ:NVDA). I looked at four things: track record of generating profits and free cash flow, valuation, financial position and growth.

Here’s what I found.

Profits and Free Cash Flow

Intel and Qualcomm boasted the highest gross margins since 2013, around 60%. Broadcom and Nvidia were slightly lower. Advanced Micro’s margin, already the lowest in 2013 at 37.33%, declined to 23.36% in 2016.

AMD’s net margin and free cash flow margin were mostly negative from 2013 to 2016, below the other four.

Valuation

Since AMD was in the red in 2016, I could not compare it with the other four chipmakers using metrics such as price-to-earnings. Instead, I had to look at price-to-book and price-to-sales.

AMD had the highest price/book ratio, at 25, ahead of Nvidia (13.69), Broadcom (5.06), Qualcomm (2.71) and Intel (2.56). This stemmed from AMD’s greater degree of leverage, which pushes book value down.

Admittedly, AMD stock had the lowest P/S.

Financial Position

Advanced Micro Devices had the weakest financial position of the five. Its debt-to-assets and debt-to-equity ratios were the highest. And unlike the other four, AMD also had negative working capital and a retained earnings deficit.

Growth

Broadcom also grew revenue, gross profit, capex and operating cash flow at the fastest rates.

Growing sales at a 73.85% annual rate, Broadcom managed to more than quintuple its revenue. Nvidia increased sales by about two-thirds, or 18.71% annually, still impressive. Intel grew sales at lower rates, while Qualcomm and AMD posted declines.

Likewise with gross profit, which Broadcom grew at a 71.02% annual rate, again ahead of NVIDIA (21.46%) and Intel (4.71%). Qualcomm’s gross profit declined by 1.82% annually, while AMD’s gross profits decreased by over 20% annually. In 2016, AMD’s gross profits were slightly more than half of what it earned in 2013.

Broadcom also grew operating cash flow at a 67.8% annual rate, ahead of NVIDIA at 26.03%. Intel’s operating cash flow increased at a 1.62% annual rate, while Qualcomm’s declined. AMD showed some improvement here, going from negative in 2013 to positive in 2016. But in the most recent quarter, AMD fell back into the red.

A growing company should be investing more in things like plants and equipment. Broadcom tripled its capex from 2013 to 2016, but capex at the other four declined.

And despite growing its capex at a 45% annual rate, Broadcom managed to increase free cash flow faster than the others. Broadcom’s free cash flow rose by 15.93% annually, ahead of Qualcomm at 14.99%.

Bottom Line on AMD Stock (And the Others)

Again, if you want to buy a semiconductor stock, I would instead recommend Intel and Qualcomm. They have a much better track record of generating profits and free cash flow, in contrast to AMD, which rarely delivers these. They also trade at lower valuations and have stronger financial positions.

Also, their stock prices don’t swing as wildly as AMD stock, and would probably be less impacted by cyclical weakness.

Let’s look at some scenarios.

Scenario 1: The economy continues growing, leading the Federal Reserve to keep tightening rates (something they’re expected to continue doing with its Wednesday announcement). Higher interest rates would probably affect Intel and Qualcomm less than AMD. In the most recent quarter, AMD had a debt/equity ratio of 3.44, compared to 0.38 for QCOM and 0.39 for INTC. And Intel and Qualcomm could fund themselves from retained earnings and the cash they generate. Advanced Micro, on the other hand, would have to issue debt or equity.

If Advanced Micro Devices issues debt, it would be borrowing at higher interest rates. If it issues equity, investors would apply a higher discount rate to the stock, meaning it wouldn’t be able to raise as much cash.

This scenario could prove challenging for AMD and other tech stocks with negative free cash flows, like Netflix, Inc. (NASDAQ:NFLX), Snap Inc (NYSE:SNAP) and Tesla Inc (NASDAQ:TSLA).

Intel and Qualcomm should outperform AMD in this scenario, as they are less likely to be squeezed for cash and have trouble financing themselves.

Second Scenario: The economy does poorly.

This would also harm Advanced Micro Devices more than Intel and Qualcomm, since the latter two are lower-beta stocks. And with their stronger fiscal positions, they could probably withstand a cyclical downturn better than AMD.

Also, as I mentioned at the end of my previous article, the winner-take-all nature of the semiconductor industry benefits market leaders like Intel. McKinsey & Company found that from 1996 to 2009, all chipmakers other than Intel actually destroyed shareholder value. Another study found that from 1984 to 2005, Intel managed a return on assets of 13.1%, while other semiconductor firms posted a measly 2.7% return on assets, less than the average yield of 6.5% on a five-year Treasury bond during this period.

AMD stock is somewhat speculative; the rewards might be high, but so is the risk.

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/advanced-micro-devices-inc-amd-stock-doesnt-stack-up/.

©2024 InvestorPlace Media, LLC