In its latest earnings, Advanced Micro Devices (NASDAQ:AMD) reported sales down 13% year-over-year. Qualcomm (NASDAQ:QCOM) also reported sales down 13% on a non-GAAP basis. But I think AMD’s finances are in worse shape than those of QCOM — and even those of Nvidia (NASDAQ:NVDA).
All things being equal, investors in the chip sector should invest in either QCOM or NVDA. I have written articles recently on both, and in those I focused on these companies’ free cash flow (FCF) generating ability and their balance sheets.
AMD Stocks ’s Free Cash Flow is Worse Than Qualcomm and Nvidia
Free cash flow is the actual cash amount of earnings a company makes after all expenses and capital expenditures. There are two ways to compare this number between companies. First, you can look at the margins (FCF divided by sales), and second you can see how the stock market values it by comparing the free cash flow yields (FCF divided market value of the stocks).
It turns out that AMD has produced FCF of -$28 million in the last three months, and -$303 million in the past six months. Its sales were $1.5 billion for the last three months and $2.8 billion in the last six months. That means for every dollar of sales, it lost 1.8% (three months) and 10.8% (6 months) in real cash flow.
By contrast, Qualcomm had FCF of $4.6 billion on sales of $9.635 billion in the last three months, or FCF margin of 48.4%, and a 28% FCF margin over the last nine months. Nvidia reported a 29% FCF margin on sales of $4.8 billion in the last six months.
AMD has a FCF yield of -1.8% on its market value of $32.8 billion. But QCOM’s FCF yield is 7.7% on its market value of $89.9 billion, and NVDA has a 4.3% FCF yield on its $98.5 billion market value. So the market does not appreciate AMD’s free cash flow as much as Qualcomm’s and Nvidia’s.
Balance Sheet Differences
Another issue is that AMD does not have the same liquidity as its peers. AMD has just $1.1 billion in cash and securities compared to its market value of $34 billion. That is just 3.2%. QCOM has $14.4 billion compared to its $92 billion market value, or 16%. NVDA has $8.4 billion which is 8.3% of its $101 billion market value.
On a net basis, after including short and long term debt, the three are a little more equal. But the fact remains that AMD has less gross liquidity and ability to weather storms than both Qualcomm and Nvidia.
Part of the problem is that AMD competes in more commodity areas of the chip market, such as gaming, graphics and crypto chips. Qualcomm and Nvidia are more heavily focused in specialized niches. QCOM stock is driven by a large patent portfolio of technology which produce steady, recurring earnings for the company. NVDA has specialized in artificial intelligence applications for its chips, a very profitable niche.
What Does This Mean to Me as an Investor?
First of all, AMD does not pay a dividend. QCOM does, and its dividend yield is 3.3%. Even NVDA pays a dividend with a yield of 0.4%. That should be enough to make up your mind on whether to invest in AMD vs. Qualcomm or Nvidia.
But wait, there’s more. AMD does not buy back shares and thereby enhance its earnings and dividends over time. Both QCOM and NVDA have regular buyback programs.
In fact, Qualcomm is expected to buy back $1.3 billion in stock this year, giving it a buyback yield of 1.44% (i.e. $1.3 billion divided by its market value of $89.9 billion). So if you add up QCOM’s dividend yield and buyback yield, it sports a total yield for investors of almost 5% (i.e. the 3.48% dividend yield plus the 1.44% buyback yield).
By contrast, AMD has a 0% total yield. They do not provide any return on capital to shareholders. Keep in mind it has a $34 billion market value. That’s not right. Something must be wrong with their fundamental profitability on a real cash basis.
Bottom Line on AMD Stock
You can read all the articles about how great a company Advanced Micro Devices is on InvestorPlace. But I’m here to tell you AMD’s finances and capital returns for shareholders do not match up to those of both Qualcomm and Nvidia.
In short, AMD does not have the financial health and capital returns that both QCOM and NVDA offer investors.
As of this writing, Mark Hake, CFA, does not hold a position in any of the aforementioned securities. You can subscribe to Mark Hake’s Total Yield Value Guide here.