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Advanced Micro Devices ( AMD US ) USD 104
Advanced Micro Devices has been the uncontested star of the US stock market in the past five years, rising from US$ 1.51 in July 2015 to a high of 122 in August of this year, an 8100 % rise in 6 years.
AMD is, without a doubt the shining star of the semiconductor industry, lifted by video streaming and online gaming demand for its chips, and it has indeed delivered the goods.
Over the last three years, AMD has nearly tripled its revenue, moved from a loss in 2017 to 3 Billion profits in 2021, improved its profit margin from 5 % to 25%, and raised its earnings per share from USD 0.33 in 2018 to USD 2.5 % in 2021 – all while doubling its R&D expenses.
All this was made possible because of the huge development of cloud computing, gaming and streaming and a fierce competition between AMD and Intel were AMD has taken significant market share form Intel.
The move was also accelerated by the pandemic and confinements that led younger and older generations spending far more time playing games on their consols, tablets and smartphones.
Much of the chip game now is a race to eat up competitors’ market shares and there is potentially still plenty of room left for AMD to continue to grab market share from INTEL.
The fact that AMD is fabless gives it an edge over Intel in this cutthroat environment Intel relies on volume to benefit from its fabs, as fabs come with high fixed costs. The more of Intel’s market share AMD nibbles at, the more difficult it becomes for Intel to gain excess profits via economies of scale.
Analysts are strongly positive for AMD’s business outlook, including its forays into cloud server chips and the acquisition of XILINX
Advanced Micro Devices’ refreshed server CPUs and new PC chips will probably be in high demand in 2021 and 2022 while it will also benefit from a game-console refresh cycle.
AMD’s updated guidance calls for 60% sales growth in 2021, revised up from earlier projections of 50% and 37%. Gross margins should also widen on a stronger mix of server CPUs offsetting higher sales of less-profitable console chips.
New products continue to gain share, and AMD’s pending Xilinx merger will diversify its portfolio vs. Nvidia and Intel.
Advanced Micro Devices’ renewed wafer-supply agreement with GlobalFoundries is flexible, cost-efficient, low-risk and advantageous, sparing AMD from having to exclusively use the outsourcer for lagging-edge nodes. And is actively diversifying its suppliers with TSMC and other foundries, but it remains highly dependant on outsidechip manufacturers.
Amid a global chip-supply crunch that may last for several quarters, AMD’s renewed supply agreement with GlobalFoundries (GF) is flexible, tactical and cost-efficient. AMD will only source chips made on 12- and 14-nanometer transistor technology for 2022-24 from GF, keeping TSMC as its key leading-edge supplier for advanced CPU die made on sub-7-nm nodes.
AMD’s chiplets that combine the two are likely to be an optimal cost profile, and the $1.6 billion in guaranteed payments to GF to secure supply is small for AMD, potentially producing about $3.08 billion in sales based on a 48% gross margin, or about 6% of the conservative $16.9 billion consensus for 2022-24 annual sales.
The advanced-logic market is likely to expand and diversify. A flexible chiplet design with a variety of suppliers will continue to give AMD a competitive advantage over Intel’s integrated device manufacturer model which is attempting to shift to chip-lets
AMD’s server revenue gains in the data center have substantial room to expand. Share gains from Intel in servers, a rising tide of cloud-server spending through 2021 and a better corporate-IT backdrop in 2H may amplify the company’s growth.
TSMC’s production constraints may be a near-term inhibitor, which will likely abate later in the year. Intel’s transistor shrinkage issues may yet be a tailwind for AMD over the course of 2021. The company’s gains in the high-performance computing arena may also bolster its performance credibility in the cloud and corporate-IT markets.
When looking at the long term, AMD’s prospects are indeed rosy and if the company can execute its strategy well, then the stock could command higher prices in the long term.
HOWEVER, IN THE SHORT TERM, WE BELIEVE THAT THE STOCK HAS GONE AHEAD OF ITSELF AND CONSIDER THAT THE STOCK IS OVERVALUED BY BETWEEN 160 and 220 %.
AS OUR INVESTORS KNOW, WE BELIEVE THAT AMD HAS MADE AN SIGNIFICANT TOP IN AUGUST 2021 AND IS DUE FOR A SHARP CORRECTION ANY TIME SOON,
AMD’s performance and valuation have improved while Intel’s has declined since 2016, and this divergence may remain until Intel’s turnaround is clear. But Intel could surprise on this very soon.
Valuations also diverge: AMD’s 42x forward P/E is the second-highest among the Global Semiconductors Top Peer Group and Intel’s 13x is the fourth-lowest, ahead of the memory makers SK Hynix, Samsung and Micron. This provides the set up for a mean reversion.
Even with a portfolio that’s mixed between CPUs and GPUs, AMD’s 45% gross margin has notably lagged behind Intel’s at 58% and Nvidia’s 66%. Though its 50% margin target may be a few years away, and is highly dependent on its suppliers.
The stock is currently trading at 42 x price-to-2021 earnings, which is 100% higher than the market average.
In addition, EPS is inflated in the short term due to AMD having taken a $1.3B tax benefit. Specifically, this tax benefit has inflated the EPS by 169%. Without this tax benefit, the price-to-earnings rises to 59 x, or 229% higher than the market average.
The problem here is with valuation, not the stock itself.
Are AMD’s prospects such that it deserves such a premium valuation when compared to its peers ?
Stocks usually mean-revert, both against their own gains and against their fundamentals. AMD is overdue for such mean reversion and negative surprises could come form either a turnaround in Intel’s business model or NVIDIA taking more market share.
A new offering or strong performance from Intel’s CPUs or Nvidia’s GPUs could send shockwaves across the sector, negatively impacting AMD’s stock price.
Moreover, October has been usually an awful month for AMD investors.An interesting analysis shows that over the past fifteen years, while holding AMD would have led to a cumulative return of 220%, holding AMD over the months of October would have led to an astonishing 83% loss.
AMD will realise its Q3 results and guidance for the future on October 27th
Given the price of the stock relative to its fundamentals, mean reversion, downside risk, and strong seasonality, we believe a short position on AMD is warranted.
We have been trading the down side systematically for some tome now and have just re-instated our short position yesterday.
A strong SELL signal is developing in the weekly MACDs …
and the stock is failing to gather momentum on the upside…
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