Quality growth, but valuation reflects this

Advanced micro-systems (AMD) is one of the world’s largest suppliers of PC microprocessors and graphics processors to computer manufacturers. The company’s main product lines include desktops, laptops, servers, GPUs and embedded/semi-custom chips. AMD has generally positioned itself as a solid #2 leader behind semiconductor giant Intel (INTC).

AMD was founded in 1969 and has been publicly traded since 1972. I’m neutral on AMD stocks, as the company appears to have a lot of growth ahead of it in this current chip cycle; however, the stock’s more than 730% gain over the past five years may already reflect this strong growth.

Investment premise

AMD is the only chip and processor company with the capability and financial strength to challenge the industry’s two biggest players, Intel and Nvidia (NVDA), in the potential $50 billion market opportunity in PC, server, high-end gaming, deep learning and related markets.

Additionally, the business model allows for semi-custom product and licensing options with new customers, which would create additional leverage in the business model.

Moreover, with the recent acquisition of Xilinx by AMD, it can accelerate its penetration into markets like communication infrastructure, where it has never been a major player. Considering Xilinx’s product lineup, this may add $30 billion to $50 billion to AMD’s total addressable market.

Acquisition of Xilinx

In October 2020, AMD announced that it had entered into a definitive agreement to acquire Xilinx in an all-stock transaction valued at $35 billion. Xilinx is an industry-leading producer of Field Programmable Gate Arrays and adaptive SoCs, as well as AI engines and related software.

The deal is expected to be immediately accretive to gross margins, operating margins, EPS and free cash flow. The combined company will have approximately 15,000 engineers. The deal closed in February 2022 for a final value of $49 billion.

Financial analysis

AMD reported a very strong 2021, with revenue up 68% to $16.4 billion and gross profit up 82% to $7.9 billion. This was driven by strong revenue growth in the Computing & Graphics and Enterprise, Embedded and Semi-Custom segments.

Non-GAAP operating profit was $4.1 billion, compared to $1.7 billion a year earlier. The growth in operating profit is mainly attributable to the increase in revenues and the expansion of the gross margin.

Diluted non-GAAP EPS was $2.79 in 2021, compared to $1.29 the prior year.

Balance sheet

Cash and short-term investments were $3.6 billion at the end of 2021. Total debt was just $313 million. Inventories appear to be in good shape at $1.96 billion, a 40% increase, which is significantly lower than the increase in sales.

Cash flow from operations was $3.5 billion, compared to $1.1 billion a year earlier. Free cash flow was $3.2 billion, compared to $777 million a year earlier. Operating cash flow and free cash flow in 2021 included strategic investments in long-term supply chain capacity to support future revenue growth. The company repurchased $1.8 billion in common stock in 2021.


For fiscal year 2022, AMD forecasts revenue of approximately $21.5 billion, which would represent an increase of approximately 31% over 2021. The company expects this growth to come from all of its businesses. and also expects its non-GAAP gross margin to be approximately 51% for 2022.

Based on these forecasts, analysts estimate EPS for 2022 to be $4.00 and $4.65 for 2023. AMD stock is currently trading at 28.6x current year estimates and a forecast EV/EBITDA of around 22x.

Analysts expect free cash flow to grow from $3.2 billion in 2021 to over $8.6 billion in 2022.

The Taking of Wall Street

On Wall Street, AMD has a moderate buy consensus rating based on 15 buys, six takes, and no sell ratings given over the past three months. At $154.24, the average price target for advanced micro devices implies 34.6% upside potential.


I am neutral on AMD stock. Although the company appears to have a lot of growth ahead of it in the current chip cycle, the stock’s strong gains over the past five years may already reflect that strong growth.

A return to more realistic valuations may be warranted before starting a position in AMD.

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