The reality is that Dr. Lisa’s Su’s baby has underperformed NVDA and SOXX for more than a year now. Has the party ended for the good doctor?
Business Remains Strong
The company reported better-than-expected Q4 2020 earnings at the end of January. In 2021, it expects sales to grow 37% to $13.4 billion with a 47% gross margin. In 2020, it had $9.8 billion in sales and 45% gross margins. Given operating profits were about 38% of its gross profit, AMDs operating profit should increase by 44% to $2.39 billion [$13.4 billion multiplied by 47% gross margins multiplied by 38%].
Business definitely remains strong.
Now, it just needs to bring home its $35-billion acquisition of Xilinx (NASDAQ:XLNX) and it will be off to the races. The shareholders of both companies vote on the deal on Apr. 7. If successful, the combined entity will have an enterprise value of approximately $135 billion.
At the time of the announcement last October, AMD and Xilinx were confident the combined company could be a player.
“AMD will offer the industry’s strongest portfolio of high performance processor technologies, combining CPUs, GPUs, FPGAs, Adaptive SoCs and deep software expertise to enable leadership computing platforms for cloud, edge and end devices,” the Oct. 27, 2020, press release stated.
“Together, the combined company will capitalize on opportunities spanning some of the industry’s most important growth segments from the data center to gaming, PCs, communications, automotive, industrial, aerospace and defense.”
In the all-stock transaction, each Xilinx share will be exchanged for 1.7234 AMD shares. When AMD made the deal in October, the fixed exchange rate valued XLNX shares at $143. As I write this, they’re trading around $123, precisely where they were last October, while AMD stock’s around $77.40, about 7% lower than the $82.97 a share value used for the exchange ratio.
If you’re an XLNX shareholder, don’t fret. You’ll get that 7% back in no time. Here’s why.
Free Cash Flow to Push AMD Stock to $100
When the AMD/Xilinx tie-up was just rumored in October, I argued that the company should pay for the deal entirely with AMD stock.
“To not take advantage of the 4,200% rise in the value of its share price over the past five years to make what is possibly a transformative deal for the company merely because interest rates are historically low is short-sighted, in my opinion,” I wrote at the time.
“Who knows when AMD’s stock will be this valuable again as M&A currency?”
Wisely, that’s precisely what it’s done. Despite its share price falling back since then, the markets are relatively expensive. As a result, I think you’ll see a lot of all-stock deals in 2021.
Hopefully, this one will get completed in April.
In the meantime, Advanced Micro Devices continues to grow its free cash flow (FCF). In October, it had a trailing 12-month (TTM) FCF of $610 million. It finished 2020 with an FCF of $777 million, up from $276 million a year earlier. Based on an enterprise value of $90.6 billion, that’s an FCF yield of 0.9%. At the end of December, it was 0.7%, 20 basis points less.
Xilinx’s TTM FCF is $1.13 billion. Together, it is $1.9 billion. Based on a $135 billion enterprise value, the combined entity has an FCF yield of 1.4%.
That’s getting awfully close to Nvidia territory — NVDA has an FCF yield of 1.5% based on TTM FCF of $4.69 billion and an enterprise value of $307.0 billion — but that will change should it be successful in its pending $40 billion acquisition of Arm Ltd.
I’ve been a fan of Nvidia’s free cash flow for a long time. Should AMD pull even with its bigger rival, I could easily see AMD stock going to $100 and beyond in 2021.
Its stock just needs to get off the schnide. That may happen on April 7.
Long-term, it’s an excellent buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.