With a daily loss of -2.69%, a 3-month gain of 6.39%, and a Loss Per Share of 0.02, Advanced Micro Devices Inc (AMD, Financial) presents an interesting case for value investors. This article aims to answer the question: Is AMD fairly valued? We invite you to join us in this comprehensive analysis of AMD's valuation and financial health.
Understanding Advanced Micro Devices
Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries. The majority of its sales are in the personal computer and data center markets via CPUs and GPUs. AMD also supplies chips for prominent game consoles such as the Sony PlayStation and Microsoft Xbox. In 2022, AMD acquired field-programmable gate array leader Xilinx to diversify its business and augment its opportunities in key end markets like the data center and automotive.
At its current price of $108.35 per share and a market cap of $175.10 billion, AMD appears to be fairly valued when compared to our estimate of its intrinsic value, also known as the GF Value.
Deciphering the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
According to our analysis, Advanced Micro Devices (AMD, Financial) appears to be fairly valued. This suggests that the long-term return of its stock is likely to be close to the rate of its business growth.
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Analyzing AMD's Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, a careful review of a company's financial strength is crucial before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. AMD has a cash-to-debt ratio of 2.2, which ranks better than 52% of companies in the Semiconductors industry. Based on this, GuruFocus ranks AMD's financial strength as 8 out of 10, suggesting a strong balance sheet.
Assessing AMD's Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Advanced Micro Devices has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $21.90 billion and Loss Per Share of $0.02. Its operating margin is -1.73%, which ranks worse than 73.98% of companies in the Semiconductors industry. Overall, the profitability of Advanced Micro Devices is ranked 7 out of 10, which indicates fair profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Advanced Micro Devices is 35.7%, which ranks better than 89.04% of companies in the Semiconductors industry. The 3-year average EBITDA growth rate is 76%, which ranks better than 90.65% of companies in the Semiconductors industry.
ROIC vs WACC
Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Advanced Micro Devices's return on invested capital is -0.08, and its cost of capital is 15.43.
Conclusion
In conclusion, the stock of Advanced Micro Devices (AMD, Financial) shows every sign of being fairly valued. The company's financial condition is strong and its profitability is fair. Its growth ranks better than 90.65% of companies in the Semiconductors industry. To learn more about Advanced Micro Devices stock, you can check out its 30-Year Financials here.
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