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Summary of Operations
AMD is a rising, global producer of semiconductors. It provides state-of-the-art product for commercial and personal computing, supporting everything from gaming and entertainment to servers and cloud networks. It has lately been a cash cow, boasting little debt, profit margins over 40%, and growths at similar a level.
Strategy
AMD offers a wide scope of high-quality chips in a market where the demand for semiconductors exceeds what AMD and other producers can supply. While they have been boosting revenues impressively, their dependence on Microsoft and competition with Intel should not be taken lightly. Management has been firm on this, so while they are financially healthy, they have not yet established a healthy moat. The merger with Xilinx may help this but has taken longer than thought. Chinese authorities only finally approved it today (US and EU regulators already did). AMD will need to make continued investments in expansion to catch up to Intel’s dominance and ensure its own safety.
Growth and the Future
Revenues have been growing in the upper forties the last couple of years. With their prestige in their industry and high demand for chips, AMD has a bright future, but growth at these rates not very sustainable, and one can expect they will decline to more practical levels (but still impressive levels). Of concern is AMD’s buyback campaign, even in the face of questionably high valuations. This is great for those leaving the company but not for new shareholders.
Valuation
Normally I use the annual reports, but with so much growth, I had to use quarterly earnings and have estimated AMD will make about $3.1 billion in free cash flow this year. Estimating a more practical growth rate than in the forties, I would give it an intrinsic value of about $114 billion. With the recent decline of the stock price, AMD currently sits at $123 billion, suggesting it is slightly overvalued.
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