Monday, 13 March 2017

Some brief thoughts on Advanced Micro Devices, Inc (AMD)

AMD make chips, they are the distant also ran to the mighty Intel. Remember back in the 2000s when 'Intel Inside' was a thing? Well they won the race and AMD have been the second fiddle ever since.

Note however that in the past one year AMD shares are up 411% against a 23% gain in the Nasdaq and an 11% gain for Intel. Now this is principally due to a lot of hype around the new 'Ryzen' chips. Now the reviews are out, and the products are decent. But they aren't game changers. They are just cheaper than Intel's equivalent offering and slightly less powerful for gamers. Which has been AMD's offering for the past 10 years!

Anyway aside from the hype let us just glance quickly at the financials of AMD. This is a company that has not made a profit in the past 5 years and only turned a profit in 3 of the last 10 years (2009, 2010, 2011). It hasn't made an operating profit in the past 4 years. Operating cash flow has been negative for four of the last five years. It hasn't paid a dividend in 10 years.  It has 50% more shares in issue today than 10 years ago. I don't really need to continue. It is a dog. But every dog has its has AMD's come?

Well I don't want to prognosticate on the future of Ryzen only on the limitation to valuation implied by even the most bullish sell-side calls. According to the FT the highest EPS estimate of any sell-side analyst for as far out as 2018 is 0.78c per share. Now given the current value of $14 per share that implies a 2018 forward multiple of 18x earnings. That is the most aggressive estimate and that is for earnings in nearly 2 years time!

To put this in perspective you can buy rival Intel for 13x trailing earnings from 2016! (2018E lowest estimated P/E is 13x) Now I can't say whether I think Intel is worth this but surely the incumbent player who has made a net profit every year for the past 10 years, an operating profit every year for 10 years, had positive operating cash flow every year for 10 years, paid increasing dividends every year for 10 years and bought back 20% of its shares over that time cannot be worth a lower multiple than AMD.

Now if the chips really are good this should be causing a fall in the stock price of Intel not a rise for AMD as Intel will have to discount their latest line of CPU's to reduce the current 'best bang for your buck' position of AMD's new product line.

AMD by this account looks terribly overvalued. Maybe they will exceed even the most bullish estimates set by the sell side for 2018, maybe this is a new dawn for AMD. But I doubt it.

Disclosure: I have a very modest short position in AMD. I have no interest in Intel Corp.

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