Advanced Micro Devices (NASDAQ:AMD) stock has been rising since its Q3 earnings report on Oct. 29. The report showed that Advanced Micro Devices became free cash flow (“FCF”) positive during the quarter.
Given AMD’s market share gains against Intel (NASDAQ:INTC), it looks like AMD will stay FCF positive for the near term. That will continue to help AMD stock rise.
AMD reported revenue up 9% YoY and 18% quarterly. But more importantly, its non-GAAP net income margin rose one-third to 12.1% from 9% a year ago.
In terms of cash flow, adjusted EBITDA was $300 million or 16.7%. This is 32% higher than a year ago, but 84% over a quarter ago. That is a very strong cash flow report. More importantly, free cash was $179 million, positive for the first time in a good while.
Analysts Are Becoming Positive on Advanced Micro Devices Stock
Recently RBC reiterated its Outperform rating on AMD stock. Another analyst in Seeking Alpha argues that AMD’s server technology is superior to Intel’s. He suggests that AMD will dominate Intel server technology through 2020.
Another analyst argues that revenue is set to rise over the next several years, along with earnings. He argues that Advanced Micro Devices stock is cheap at only 20 times earnings expected for 2020.
The analyst in the article cited last above argues that AMD’s resurgence is due to its 7-nanometer chips, which compete effectively against Intel’s chips. In addition, the company has proven it can steal market share from Intel in the enterprise server market.
AMD’s guidance for Q4 suggests that revenue will grow 48% year over year and 17% sequentially. The company expects its gross margins to be 44%, compared to 43% this past quarter. That implies that free cash flow will continue to be positive as it was in Q3 2019.
AMD Should Hold Strong
I pointed out in my article in late September on AMD that once the company is FCF positive it may begin either dividend payments and/or buybacks. I suspect that won’t happen until after the fourth quarter or maybe even several quarters of FCF positive performance.
All of AMD’s competitors pay a dividend. Intel’s dividend yield is 2.17%, Qualcomm (NASDAQ:QCOM) stock yields 2.73%, and even Nvidia (NASDAQ:NVDA) pays a small dividend that yields 0.31%.
So how much of a dividend could AMD afford? Assuming it paid out 50% of its FCF each quarter, AMD could pay $90 million. As AMD has 1.113 billion shares outstanding as of Oct. 30, the dividend could be 8 cents per share per quarter. Annually, the 32 cent dividend would provide a dividend yield of almost 1% (0.8%).
That would be a better dividend yield than Nvidia, but worse than Intel than Qualcomm. In effect, you can see that free cash flow is very important for AMD stock since it provides the possibility that AMD could pay a competitive dividend yield.
What Should Investors Do?
Potential investors in Advanced Micro Devices stock should carefully monitor AMD’s free cash flow progress. This is the key to whether the company will decide to pay a dividend in the future.
At 20 times next years’ earnings, Advanced Micro Devices stock is not expensive given its turnaround and potential dividend yield possibility. If AMD meets or exceeds its revenue and margin guidance in the fourth quarter, look for the stock to continue to rise.
As of this writing, Mark Hake, CFA, does not hold a position in any of the aforementioned securities. Mr. Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. New subscribers receive a two-week free trial.
