Partner and reference models of AMD's Radeon RX 6800 XT & RX 6800 graphics cards are out of stock globally exhibiting a strong demand for its products and supply constraints that have plagued several high end products this year.
Chip designer Advanced Micro Devices, Inc (AMD) announced its decision to acquire programmable computing solutions designer Xilinx, Inc in October. AMD is known for its processors and graphics processing units, and through the deal, the company hopes to expand its silicon footprint to also include a variety of products that Xilinx sells - in a move that will better place AMD strategically against its traditional and larger rival Intel Corporation and also allow the company to target the growing artificial intelligence, datacenter and 5G segments.
As part of its offer and calculations for the deal, AMD provided its future financial projection estimates to DBO Partners, LLC - AMD's financial advisory firm for the entire affair. These projections go beyond the details that AMD had revealed in its financial analyst day earlier this year, and they provide a glimpse into what the company expects of itself over the course of the next five years.
'AMD Maintains ~20% YoY Revenue Growth For Next Two Years And Tapers It Down To 12% For the Fiscal Year 2025
The projections, part of AMD's Form S4 filed with the Securities and Exchange Commission (S.E.C.) yesterday, also provide estimates for the company's internal revenue growth rate for the years beyond the fiscal year 2023. These estimates (Page 139) are important because they let us compare how the company's growth expectations might have evolved since its analyst day which came before the full extent of the economic disruption from the ongoing pandemic became clear, even if AMD and other companies have seen an uptick in demand for personal computing (PC), mobility and data center products in its wake.
At the analyst day, AMD provided a compound annual growth rate (CAGR) of 20% for the next five years. During the company's presentation, chief financial officer (CFO) Mr. Devinder Kumar had stated that this figure, part of the company's long term model, was for the next four years - or for the end of the fiscal year 2023.
Based on this, AMD's revenues for the years, assuming a flat 20% year-over-year growth turn out as:
| Revenue ($ Millions) | 2019 (Actual) | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 |
|---|---|---|---|---|---|---|---|
| Analyst Day CAGR of 20% applied evenly: | 6,731 | 8,683 | 10,420 | 12,504 | 15,005 | - | - |
| Form S4 Filed on Friday, December 4 2020: | 6,731 | 9,319 | 11,500 | 14,000 | 17,000 | 19,550 | 22,000 |
| Growth rate implied by S4: | - | 38% | 23% | 22% | 21% | 15% | 13% |
The new estimates, including those for fiscal years 2024 and 2025 along with their assumed growth rates have also been provided before. Safe to say, the 38% growth that AMD is projecting for this year is not something that anyone would have predicted for the company at the start of this year, as it shows the nature of the unprecedented times that we are currently living in.
AMD's revenue for the first nine months of this year stands at $6,519 million, showing that the company has nearly met last year's figure with a full quarter to spare and expects to earn an additional $2.8 billion revenue during the current quarter - which in turn will mark for a neat 31% year-over-year growth for the quarter.
Additionally, and perhaps more importantly, the chip designer has also provided figures for earnings per share (EPS) and Unlevered (debt-free) Free Cash Flows for the current and the next five years. The latter lets us take a wager at determining the company's fundamental share price value based on the Discounted Cash Flow Model. This determination and its inputs are shown as follows:
A few caveats to note about the calculations above. Firstly, we've taken EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) instead of EBIT which is the standard in such cases. Secondly, we've used both debt and interest expense for the first nine months of this year, as stated by AMD in its S4 and form 10Q. while EBITDA is the forecast for the complete FY2020 (the implications of this being minor). Thirdly, while not strictly a caveat, diluted shares have been used which assume that all of the company's warrants and options have been exercised. And finally, we've also used a terminal growth rate of 10% since most of the rhetoric around AMD focuses on its massive growth potential given Intel's process node worries. A standard terminal growth rate for DCF calculations is 3%, but this is too low for AMD in our opinion. Therefore it should be clear that the results above are far from being set in stone and any and all suggestions are welcome.
AMD's EPS forecasts for the fiscal year 2020 and the following five years in the S4 Form are $1.20, $1.56, $2.19, $2.90, $3.41 and $3.90 respectively. AMD's peers or near-peers in the semiconductor segment with their forecasted P/E ratios for 2022 and 2023, as per the NASDAQ are as follows:
- Intel Corporation (2022) (NASDAQ:INTC): 10.07
- NVIDIA Corporation (2023) (NASDAQ:NVDA): 0.54
- Texas Instruments (2022) (NASDAQ:TXN): 25.98
- International Business Machines (2022) (NYSE:IBM): 10.39
- ON Semiconductor Corporation (2022) (NASDAQ:ON): 16.53
Based on its EPS forecast for 2025 and Friday's closing price of 94.04, AMD's P/E ratio turns out to be ~24 - which is slightly below TI's and above that of others. Using the Philadelphia Stock Exchange capitalization-weighted index of semiconductor stocks (PHLX Semiconductor Sector - iSOXX)'s weighted-average-price-to-earnings ratio of 29.87 and forward P/E ratio of 19.8 and using them to derive AMD's share price reveals values of $117.09 and $77.6 respectively - as the figures paint a slightly better picture than what the DCF analysis revealed.
Safe to say, and as the numbers reveal, AMD's future is far from mirroring what you'd expect from a traditional company. Intel's manufacturing problems have left the field wide open for Dr. Lisa Su and her team (as evident by a small data set of processor sales), and judging by Taiwanese fab TSMC's plans to shift production inside the U.S., Apple's shift to its in-house M1 processor for the MacBook and AMD's lead in terms of benchmarks and manufacturing process, the semiconductor industry is far more dynamic than it was before. And, the figures we've used are only for AMD and do not factor in any changes to its balance sheet and income statement should its deal with Xilinx go through - an occurrence which will transform the company's balance sheet - in terms of debt, revenue and earnings-per-share.
The Link LonkReaders are reminded to be aware that this piece does not constitute investment advice, the writer has no stake in any of the company's mentioned herein, he does not plan to acquire one either, and that all investment decisions should be made after conducting your own due dilligence and consulting registered professionals.
December 05, 2020 at 11:51PM
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