Advanced Micro Devices (NASDAQ:AMD) has been on a tear in the last year. AMD stock is up 74% in the past year. But recently, year-to-date it is up only 2% or so. The market is not as enamored with it as in the past. I suspect that AMD stock is probably fairly valued now, despite its good growth prospects.
Earnings per share (EPS) are forecast to rise 30% this year, after moving up more than 32% last year. AMD stock trades for 49 times this year’s EPS and 37.5 times next year. This is despite analysts’ estimate of 30% growth in both years.
In other words, a good deal of good news is already in the stock price at the Feb. 12 price of $93.77.
AMD’s CEO Lisa Su estimates, according to Barron’s, the present supply shortage could last through the first half of 2021. It has arisen as a result of a glut of orders coming from all sorts of manufacturers from automakers to video game console manufacturers.
A big portion of AMD’s growth comes from its specialty in gaming console chips as well as its enterprise server chips. AMD said demand grew from the current versions of the Sony and Microsoft consoles. In addition, its server revenue grew on a sequential basis.
Therefore, the chip shortage implies that the company has guaranteed revenue growth for at least the next six months. It serves to solidify analysts’ forecasts.
On the other hand, they can’t sell more than their existing capacity to produce. So, in another sense, its growth expectations, at least in the near term, will be maxed out.
AMD Valuation Assumes Perfection
There is another way to look at how high AMD stock is really at. In the latest financial report, the CEO said its outlook was for 37% revenue growth in 2021. That would bring it up to $13.375 billion, up from $9.763 billion last year.
However, assuming its free cash flow (FCF) margin stays roughly the same at 8%, FCF will be $1.07 billion.
Let’s look at that further. AMD stock has a $113.6 billion market cap at the $93.77 price. This implies that its FCF yield is a super high multiple of 1.0%. This is seen by dividing $1.07 billion by $113.6 billion market value (actually 0.94%).
If the market values a company’s FCF by more than 100 times (i.e., an FCF yield of 1.0%), it assumes almost a perfect outcome. Any kind of hiccup in the company’s growth prospects could hurt the valuation.
What to Do With AMD Stock
The Motley Fool points out that AMD has been clobbering Intel (NASDAQ:INTC) in terms of market share in the semiconductor market.
AMD’s market share was 21.7% of the overall x86 processor market (including desktops, laptops and server processors), according to the Fool. Although this was lower than in Q3, it is still substantially higher than a year ago. That was when it was at 15.1% at the end of Q4 2019.
Some market observers note that with the launch of AMD’s new Ryzen 5000 laptop processors, it could pick up to 50% of the notebook market. That would bring its overall market share even higher and above where it was in Q3 (22.4%). Moreover, Intel seems to be actively losing market share with its poor chip performance.
Therefore, the market may yet come back to raise AMD’s valuation even further. This assumes earnings and cash flow surprise on the upside.
Investors may find that holding on to their shares, despite the poor performance of AMD stock this year, is the best move. If analysts see more gains in its market share over Intel, the stock could move higher.
However, new investors considering taking a stake might want to wait for weakness. This is possibly due to its valuation which is at or near perfection.
On the date of publication, Mark R. Hake does not hold a long or short position in any of the stocks in this article.