Advanced Micro Devices (NASDAQ:AMD) CEO Lisa Su appeared in a Jan. 7 Q&A while attending CES 2020. While the series of questions and answers are worth reading, it left me wondering if she said anything to boost AMD stock.
If you’re a product nerd, Su’s answers provide lots of reasons to own AMD for the long-term. However, AMD’s weakest link is and has always been, a lack of free cash flow. Until it can generate significant positive free cash flow, the company will still face an uphill battle against Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA).
A part of the free cash flow discussion, in my opinion, revolves around R&D and marketing spend. In that regard, I’m not convinced that Advanced Micro Devices gets enough bang for its buck.
Here’s why.
Is 25% of R&D Enough?
In the trailing 12 months ended September 28, 2019, AMD spent $1.52 billion on R&D. That’s 25.2% of revenue. By comparison, Intel spent $13.41 billion or 19.0% of revenue; Nvidia spent $2.74 billion or 27.3%.
How does this translate to profitability?
AMD spends $1 on R&D to generate 20 cents in operating income. Intel makes $1.62 in operating profits from $1 in R&D, while Nvidia gets 78 cents out of every buck it spends on R&D.
By this metric, Intel wins hands down.
Taking my example one step further, let’s take each of the companies’ R&D spending productivity and translate that into a valuation perspective.
To do this, I’ll use the price-to-research ratio (PRR), which is defined as market capitalization divided by the trailing 12-month R&D spending.
- Advanced Micro Devices’ PRR: $54.3 billion divided by $1.52 billion = 35.7x
- Intel’s PRR: $259.6 billion divided by $13.41 billion = 19.4x
- Nvidia’s PRR: $152.5 billion divided by $2.74 billion = 55.7x
By this valuation metric, AMD is actually cheaper than NVDA, but way more expensive than Intel.
How About SG&A?
Using the SG&A for the trailing 12 months, AMD, Intel, and Nvidia spent $680 million, $6.1 billion, and $1.1 billion, respectively.
This means AMD spends a dollar in SG&A to generate 46 cents in operating profits. Intel spends $1 in SG&A to make $3.57 in operating profits, while Nvidia spends $1 in SG&A to get $1.95 in operating profits.
Using a price-to-SG&A ratio, AMD, Intel and Nvidia trade at 79.9x, 42.3x and 138.6x, respectively.
Once again, AMD appears to be much cheaper than Nvidia.
The Bottom Line on AMD Stock
As I said at the beginning, nerd or not, you’ll want to read Anandtech’s Q&A with Lisa Su. It provides some good insight into the future direction of the company from a product perspective. It also suggests that Su is worrying about meeting AMD’s five-year roadmap and spending very little time concerned about the competition.
That focus highlights why Su’s such a great CEO.
In 2019, AMD was the best-performing S&P 500 company, gaining 148% on the year. As a result, its stock has become quite expensive, but relative to NVDA, not outrageously so.
Yes, Intel remains the value play, but should AMD stock correct into the high $30s, anyone owning it for the long-term ought to consider buying more.
In the meantime, I believe Advanced Micro Devices spends plenty on R&D. To spend more would slow its drive to positive free cash flow, and that would be bad.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
