When talking about chip makers like Advanced Micro Devices (NASDAQ:AMD), I keep the conversation light and breezy, not complicated and full of jargon. So, when I read the company’s May 25 press release about expanding its confidential computing presence on Google Cloud, all I want to get across to readers is that it’s good news for AMD stock.
“At Google Cloud, we believe that continuously investing in emerging technologies like Confidential Computing with partners like AMD will help us address our customers’ most pressing privacy concerns,” Google Cloud’s Group Product Manager Nelly Porter stated in the press release.
In simplest terms, the latest announcement between the two companies suggests AMD’s EPYC processors will continue to take market share. After all, if Google (NASDAQ:GOOG, NASDAQ:GOOGL) is happy, most everyone else will be.
AMD’s new partnership is good. However, the free cash flow (FCF) generated will keep pushing AMD stock higher.
Here’s why.
| AMD | Advanced Micro Devices | $101.56 |
AMD Is Catching Up to Nvidia
In the past few years, even though I’m the farthest thing from a tech nerd, I’ve been fascinated by the CEOs that lead AMD and Nvidia (NASDAQ:NVDA) — Lisa Su and Jensen Huang, respectively — and what a terrific job they’ve both done growing their businesses. They indeed are two of America’s best chief executives.
On at least three occasions, Lisa Su has been in the title of my commentary. Jensen Huang’s name might not have been in the headlines of my articles about Nvidia, but his leadership has often been an overriding theme. He’s that good.
The former’s FCF generation is the one metric that’s always made me side with NVDA over AMD stock. In June 2019, I suggested investors buy on the dip mainly because of its FCF. And I wrote:
In the latest fiscal year ending January 31, 2019, Nvidia had $3.14 billion in free cash flow, which accounts for 27% of its annual revenue. While its free cash flow margin was down 300 basis points from fiscal 2018, it’s still significantly higher than many of its peers…
In fiscal 2018 (December 2018 year-end), AMD had FCF of $129 million for a 2.0% FCF margin, well below Nvidia’s. However, AMD is catching up.
Free Cash Flow and AMD Stock
In AMD’s first quarter that ended March 26, it reported a record quarterly FCF of $924 million, about 7x what it generated for 2018. Based on quarterly revenue of $5.89 billion, an FCF margin of 15.7%, a significant improvement over 2% in 2018.
When AMD reported its Q1 2022 results in early May, it raised its annual revenue guidance by 31% to $26.3 billion. Assuming its FCF margin is 15%, it will generate almost $4 billion in FCF.
Nvidia just reported its Q1 2023 results on May 25. Its FCF for the quarter was $1.35 billion for an FCF margin of 16.3%, not much better than NVDA.
While Nvidia didn’t provide full-year guidance for sales, analysts expect it to be $34.74 billion. If Nvidia’s FCF margin comes in at 16.3%, it will generate $5.66 billion in FCF.
In four years, AMD will have cut the difference between the two companies from $3.01 billion in 2018 to $1.66 billion in 2022. Lisa Su and AMD have made up 45% of the spread in four years.
The Bottom Line on AMD Stock
Lisa Su has done such a good job running AMD that announcements such as the one with Google Cloud are given indifferent treatment by investors.
The reality, however, is that partnerships like this one are a sign that AMD has climbed the mountain. Its FCF growth is further proof that it’s on the right track to track down and pass Nvidia. When I made the statement about Nvidia in 2019, there was no way I thought this could happen.
The partnership with Google Cloud is good, but AMD’s free cash flow generation will bring investors back once the markets recover in the months and years ahead.
There’s never been a better time to own NVDA stock from where I sit.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
