Should You Hold Advanced Micro Devices (AMD)?

The race for AI supremacy is on.

Nvidia (NVDA) is currently ahead of the rest. Yet, Advanced Micro Devices (AMD) has plans to cut into Nvidia’s lead.

Revenues for its data center chips, running AI large language models, jumped 80% YoY for the quarter. However, sales were basically flat from Q4 2023.

What everyone wants to know is whether AMD can catch Nvidia?

AMD’s Business

Years ago, it was AMD vs Intel (INTC).

The two battled for CPU supremacy. AMD decided to focus its efforts on design outsourcing manufacturing.

It worked wonderfully, with the company’s sales blowing past Intel over the past decade.

Today, it’s one of the leading microprocessor designers for CPUs and GPUs.

GPUs (graphics processors) are key to running AI models.

The company’s revenues break down into the following segments:

Source: AMD Q1 2024 Investor Presentation

Data centers focus on cloud computing and AI data facilities.

Client designs CPUs for desktops and notebooks.

Gaming creates GPUs for the computing gaming community.

Lastly, the Embedded segment works on processors embedded into products such as automobiles.

As you can see, the only segment that saw revenues climb QoQ was the Data Center. But that’s nothing compared to the numbers Nvidia has been able to put up.

Supply chain constraints have kept AMD from fulfilling total demand, which they expect to improve in Q2 this year.

Financials

Source: Stock Analysis

AMD was on a rocket ride until 2023.

Revenues soared, climbing almost 6x from 2016 to 2022.

Then, things slowed as pent-up semiconductor demand waned.

While gross margins remained robust, operating, profit, and free cash flow margins tanked as the company ramped up R&D to create its next generation of chips.

Cash from operations, which peaked at $3.5 billion, has dropped to $1.7 billion.

In 2021, AMD began spending $1.3 billion to as much as $4.1 billion buying back shares.

The company holds relatively little debt, giving it plenty of flexibility to spend on its future.

Valuation

Source: Seeking Alpha

AMD isn’t what we’d call a cheap stock.

It trades at extremely high valuations despite a great price-to-earnings growth ratio.

However, it’s cheaper than Nvidia.

Other stocks like Taiwan Semiconductor (TSM), which manufactures processors, trades at a far more reasonable price, as does Broadcom (AVGO).

Yet, even Intel, which has lagged the industry for yeras, isn’t exactly cheap. So, it may be that the sector as a whole is overvalued.

Growth

Source: Seeking Alpha

AMD’s YoY growth was abysmal, but so were TSM’s and INTC’s. But Nvidia blew it out of the water and expects to do so in 2024.

As we mentioned earlier, its increased spending on R&D impacted its profitability over the last few years. Intel has done that, which shows things may get worse before they get better.

Profitability

Source: Seeking Alpha

While AMD’s gross margin is strong, its EBIT and Net Income have taken a hit, though they are still positive.

Yet, compared to its peers, AMD’s profitability is lousy, save for Intel.

Our Opinion 5/10

While AMD has been a big winner in the past few years, we feel it’s overvalued.

Its efforts to take on Nvidia are the right move. We just aren’t sure how long this extra spending will last.

In the meantime, we prefer Taiwan Semiconductor and are even starting to get interested in Intel, provided it can actually pull itself out of the deep hole it’s dug.