Summary

AMD has an impressive portfolio of CPU and GPU assets and its recent quarter was a blowout.

The company is well on the path to gaining market share from Intel and has performed incredibly well in the most recent quarter.

The company has the ability to grow its EPS going forward which should result in significant shareholder rewards.

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Advanced Micro Devices (NASDAQ: AMD) briefly crossed a $100 billion market capitalization today. That makes the company nearly half the size of Intel (NASDAQ: INTC), a size at which it hasn’t been in many years. That’s not surprising though, as investors look at the details and the company’s recent earnings, AMD is poised to become a processor powerhouse.

Advanced Micro Devices Product Portfolio

AMD has one of the best product portfolios the company has ever had in its history.

AMD Product Portfolio – AMD Investor Presentation

AMD has leadership in Desktop processors with its top of the line processors having nearly 16 “Zen 2” cores. The company plans to release its “Zen 3” cores later this year further expanding on its leadership in the space. The company is taking the same 7 nm technology to expand on ultra-thin and gaming network processors.

In a world where Intel is struggling to make 10 nm processors work, AMD is a generation ahead. In the high-end Desktop world, not only is AMD much cheaper than Intel but it’s full unmatched with its thread ripper processors having up to 64 “Zen 2” cores. The company is continuing to work on its EPYC server architecture, a high margin business, and its Radeon GPUs.

AMD CPU Market Share – AMD Investor Presentation

As COVID-19 has forced business, individuals, and all computer users to take a second look at their budgets. Rather than sticking with the established supply lines companies have been taking a second loop. As a result, AMD’s market share has been growing at some of the fastest rates that it has ever grown.

The company’s Desktop market share grew by 0.6% to 19.2%, its mobility market share grew by 2.8% to 19.9%. It’s server market share grew to 5.8% from 5.1% and it’s overall market share grew to 18.3% from 14.8%. That massive growth is incredibly significant.

Especially with Intel’s recently announced difficulties in the 7 nm transition, companies will need to begin to seriously consider other suppliers, or risk falling behind in a competitive market.

Advanced Micro Devices Financial Results

AMD’s incredible strong market success has turned into exciting financial results.

AMD 2Q 2020 Financial Results – AMD Investor Presentation

AMD earned revenues of $1.93 billion in 2Q 2020 up 26% YoY from $1.53 billion in 2Q 2019. That joined along with 8% QoQ earning growth, COVID-19 actually benefited the company successfully. The company maintained incredibly strong gross margin of 44% through this time, with the company’s latest processors increasing it by 3% YoY.

Small variations caused a 2% QoQ over decline. The company kept operating expenses low at $617 million and continued to focus on profitability. The company’s net income of $157 million implies a P/E ratio of 170, but the company turned nearly all of that into FCF. Additionally at the company’s 26% growth rate, it has the potential to decrease expenses much further.

Advanced Micro Devices Earnings Potential

The key takeaway here is that the company’s growth trend is incredibly strong, which justifies its valuation.

AMD vs. Intel ASP – Gamers Nexus

Currently, AMD has 18.3% of the x86 CPU market share and hasn’t started increasing the ASP of its products to highlight its market share. AMD’s ASP has gone from $270.45 in 2018 to $211.73 in 2019. Intel, originally confident about its market share, before its CPU processor delays, rapidly raised its selling price.

As AMD rapidly increases its market share, its ability to increase earnings and profit margins should increase. Another way to look at AMD’s earning potential is to compare to Intel. Intel, before its difficulties with AMD, earned a near 60% margin that has since dropped to 54%. Simultaneously x86 processors earn roughly $40 billion annually.

That’s $24 billion in annual profit potential. If AMD can capture Intel’s 80% market share, from its leading processors likely to continue for a number of years, that’s the potential for $20 billion in annual profit from x86 processors alone. That significant earnings potential, not counting GPUs, helps to highlight AMD’s potential.

Advanced Micro Devices Outlook

In fact, AMD has significant potential going forward, as is envisioned throughout the company’s outlook.

AMD Outlook – AMD Investor Presentation

AMD is forecasting incredibly strong revenue growth with minimum dilution and strong margins. The company reported net 2019 revenue of $6.7 billion, and expects 32% growth YoY. That points to nearly $8.9 billion in 2020 revenue with gross margin at 45% and 29% operating expenditures. That points to $1.6 billion in GAAP income in 2020.

That’s nearly 5x growth over 2019 and represents some incredible strength in the company’s financials justifying its valuation. The company’s current share price is roughly $85 / share. The company’s EPS is expected to grow significantly, the company’s 2022 EPS is expected to be $1.8 / share – represent a P/E ratio of 47.

Cutting your P/E ratio in half in 2 years represents significant growth potential and highlights AMD’s strength.

Advanced Micro Devices Risk

Part of the risk that AMD continuously faces is that the company is priced for continued growth. While the company has the product portfolio to justify that growth, it’s not guaranteed. Intel could switch from its fabrication plants to AMD and be on the same process node as AMD. The company is already considering doing that.

However, until Intel changes its entire business model, and even then, AMD has an incredibly strong portfolio that will generate continued returns.

Conclusion

AMD has some risk during the downturn, and the company is valued for significant long-term growth. However, despite that, the company is well-justified in its growth potential. The company’s blowout 2Q highlighted 26% YoY revenue growth and the company expects 32% YoY growth in 2020. With fixed operating expenses that’s nearly 5x YoY net income growth.

Going forward, with Intel’s latest note delayed and AMD continuing to invest in its business, we expect that the company will turn into a cash flow machine. The company will be able to utilize that cash flow to reward shareholders. Those shareholder rewards are a key reason why investing now is a great idea.

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Disclosure: I am/we are long AMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Author: The Value Portfolio

Source: Seeking Alpha: AMD: Crossing A Well-Deserved $100 Billion Valuation

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