AMD has faced some challenges in recent months. In December, Bank of America downgraded the company, reducing its price target from $188 to $150 and shifting its recommendation from "buy" to "neutral." Shortly after, HSBC issued a double downgrade, lowering their target to $110, citing intense competition in the AI space, where they believe AMD will ultimately struggle to stay ahead. Goldman Sachs also surprised investors by labeling AMD as one to avoid in 2025, cutting their price target to $129 from $175. They mentioned modest growth prospects and doubts about AMD outperforming its competitors or meeting its market targets. A few weeks ago, another analyst downgraded the stock, maintaining a $210 target but noting expected underperformance in the data center GPU segment—an area that AMD's CEO has focused on. Despite these downgrades, Lisa Su, AMD’s CEO, was named Time Magazine’s CEO of the Year.
With AMD's stock down 31% over the last year and nearing its 52-week low, many are wondering if now is a good time to buy before they report earnings on February 4. Interestingly, both Seeking Alpha and Wall Street currently rate AMD as a "buy," despite the negative analyst outlook. When comparing recent performance, AMD has struggled significantly—down 21% over the past few months—while its competitors, like Nvidia and Broadcom, have seen positive returns. On a more positive note, AMD announced that Dell will add Ryzen-powered PCs to its commercial portfolio, marking a welcomed development for investors.
AMD At Crossroad
Expectations for AMD’s upcoming earnings report are high, with analysts forecasting double-digit growth in the next few quarters. Historical performance has been strong, and they are expected to hit just under $5 in earnings this year, with a forward P/E of 24.7. However, concerns remain due to AMD’s recent guidance trailing analyst expectations, with revenue projections sitting just below consensus. If AMD fails to meet these targets, it could negatively impact the stock. Some analysts, like Morgan Stanley, believe the stock may be undervalued after the recent sell-off, despite lower price targets.
Revenue and Growth
Looking at the numbers, AMD has shown solid revenue growth, particularly in its data center segment, which grew 122% year-over-year. Gross margin is strong, and operating income has improved, suggesting operational efficiencies. For the latest quarter, revenue is expected to be around $7.5 billion, with a gross margin of 54%. AMD is trading below its 5-year average P/E ratio of 42, potentially indicating an undervaluation. However, growth projections, while positive, do lag behind its 5-year performance.
One of AMD’s strengths is its profitability, with gross margin and bottom-line metrics outperforming the sector. Additionally, AMD has strong cash flow, generating $2.12 billion in operations, which is notably above the sector average. Despite these strengths, AMD has faced a rough year, underperforming its sector peers. However, it’s worth noting that institutional ownership remains strong at around 71%. Institutions have been buying back shares even after the stock’s significant decline, which could be a sign that they see potential in the stock moving forward.
In summary, while analysts are cautious, there are reasons to believe that AMD could offer a good opportunity for those willing to invest long-term, especially given its recent performance, institutional backing, and potential growth in key areas like data centers.
There are various ways to interpret AMD’s current situation. It's possible that analysts are overreacting, or perhaps the company is nearing the bottom, with institutional investors continuing to buy. Alternatively, the institutional buying could simply be coincidental. What stands out, however, is the inconsistency of AMD’s performance—something we don't see as frequently in other companies in the industry. When reviewing the metrics, we see that growth isn't always as steady as we’d like, particularly with free cash flow, though we do anticipate a significant increase in the next 12 months. Sales growth also shows some volatility: while some years show double-digit increases, the most recent full year saw a 4% decline, although the forecast for 2024 looks promising with a projected 10% growth.
One concern is the company’s approach to share buybacks. Instead of returning excess cash through buybacks, AMD has diluted shareholders, which isn't ideal, but considering their long-term outperformance relative to the S&P, it may not be a major concern. Similarly, inconsistencies are present in other metrics, such as return on invested capital and operating margin, where we’d typically expect to see efficiencies improve.
On a positive note, AMD does have a very strong balance sheet, with net debt to EBITDA at zero since 2019, and it's expected to remain at zero over the next 12 months. This means AMD could theoretically pay off all its debt instantly.
Now, shifting to valuation, we’ve applied our own DCF model, which gives us an intrinsic value of $189 for AMD. To get there, we’ve assumed a 30% average growth rate for free cash flow over the coming years, though it's worth noting that this is based on assumptions about future performance, and AMD’s cash flow has been somewhat inconsistent. Bloomberg believes the industry will grow at 42% over the next decade, and based on that, our valuation suggests a potential upside of 53% compared to the current market price.
Of course, these numbers are subjective, and if you run your own model, you might arrive at different figures. Our model shows that at a 25% discount rate, a buy price would be around $142, indicating a 15% upside. If you're more bullish, with a growth rate of 35%, the price target jumps to $250, which represents a 103% upside—essentially doubling the current stock price. Bloomberg’s outlook puts the target at $365, suggesting nearly a 200% upside, or almost a 3X return.
Given these variations, we typically consider the medium growth rate (30%) and apply a margin of safety of 10%. With that approach, we consider AMD a potential buy around $170. Right now, with AMD trading near $129, there could be around 35% upside, which some investors might find attractive. However, this ultimately comes down to your investment strategy—some might be comfortable with this level of upside, while others may want a bit more or a bit less.
In terms of analyst outlook, Wall Street is generally positive on AMD, with a 40% upside and an average target price of $172. Both Seeking Alpha and Wall Street have a "buy" rating on the stock at the moment.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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