Advanced Micro Devices Inc (NASDAQ:AMD) recently experienced a daily loss of -3.49% and a 3-month loss of -8.18%. The company also reported a Loss Per Share of 0.02. Despite these figures, the question arises: is AMD’s stock modestly undervalued? This article aims to unravel the intrinsic value of AMD through a comprehensive valuation analysis. Read on to discover more about the financial health and performance of AMD.
Advanced Micro Devices designs a wide range of digital semiconductors for various markets, including PCs, gaming consoles, data centers, industrial, and automotive applications. The company’s strength lies in its central processing units (CPUs) and graphics processing units (GPUs) used in PCs and data centers. In addition, AMD supplies chips for prominent game consoles such as the Sony PlayStation and Microsoft Xbox. In 2022, AMD acquired field-programmable gate array (FPGA) leader Xilinx to diversify its business and expand its opportunities in key end markets like data centers and automotive. The company’s stock price is currently $102.75, while the GF Value stands at $120.46, indicating the stock may be modestly undervalued.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from GuruFocus’s unique method. It is calculated based on three factors: historical multiples, GuruFocus’s adjustment factor based on the company’s past returns and growth, and future estimates of business performance. The GF Value Line on our summary page provides an overview of the fair value at which the stock should be traded. If the stock price significantly deviates from the GF Value Line, it may be overvalued or undervalued, affecting its future returns.
Based on GuruFocus’s valuation method, Advanced Micro Devices (NASDAQ:AMD) appears to be modestly undervalued. The GF Value estimates the stock’s fair value based on historical multiples, an internal adjustment based on the company’s past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $102.75 per share, Advanced Micro Devices stock seems to be modestly undervalued.
Because Advanced Micro Devices is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it is crucial to thoroughly review a company’s financial strength before deciding to buy its stock. A good starting point for understanding a company’s financial strength is to look at its cash-to-debt ratio and interest coverage. Advanced Micro Devices has a cash-to-debt ratio of 2.2, which is better than 51.5% of 903 companies in the Semiconductors industry. GuruFocus ranks AMD’s overall financial strength at 8 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Advanced Micro Devices has been profitable in 5 out of the past 10 years. Over the past twelve months, the company had a revenue of $21.90 billion and a Loss Per Share of $0.02. Its operating margin is -1.73%, which ranks worse than 71.98% of 953 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 88.67% of 874 companies in the Semiconductors industry. The 3-year average EBITDA growth rate is 76%, which ranks better than 90.71% of 775 companies in the Semiconductors industry.
ROIC vs WACC
Another way to determine a company’s profitability is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When ROIC is higher than WACC, it implies the company is creating value for shareholders. For the past 12 months, Advanced Micro Devices’s ROIC is -0.08, and its WACC is 15.92.
In conclusion, the stock of Advanced Micro Devices (NASDAQ:AMD) shows every sign of being modestly undervalued. The company’s financial condition is strong, and its profitability is fair. Its growth ranks better than 90.71% of 775 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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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
This article first appeared on GuruFocus.