AMD is overvalued; requires a significant price drop to justify investment.

Hi, I'm Jimmy. In this video, we're looking at advanced micro devices, ticker symbol AMD.

So, in this video, we're going to run through the basics of AMD's business. We're going to look at some of the numbers and then we're going to try to come up with a fair value for AMD stock to see if it's worth investing in today.

Now, at first glance, when we look at our starring system here on the Investors Grow website, we can see we got three stars for the cash flow statement, the income statement, and the balance sheet. So, we're off to a fairly good start.

Okay. Now let's jump over and look at the individual segments a bit more. So first we have their data center segment. This is clearly the big one that is driving a ton of revenue and this has grown a ton over the past year.

As you might imagine, this is a segment that produces chips for data centers. It's really that simple.

Now in 2025, they actually changed their reporting segments to uh they combined client and gaming to be together. Now before gaming was separate for a while there was gaming that was their bread and butter for the past few years leading up to really 2025 where the out of center chips have really grown.

Now if you're curious embedded here this is when there's uh this segment is like if there's a chip embedded in a car or maybe embedded in a vacuum or something like that their embedded chips gets their own segment but I mean individually it's actually decent number because they do big amounts of revenue.

We'll look at the financials in a minute, but relative to their other two segments, the embedded segment is not that large. Now, when we think about where they generate revenue on a global basis, this is actually a fairly diverse company.

Only about a third of their revenue is coming from the United States, which actually surprised me. I thought the number was going to be a bit larger than that.

But this brings us to one of the bigger issues, I think, with AMD. So AMD is a fabulous chip designer which basically means they do not manufacture their chips.

Well, AMD on the other hand uses Taiwan semiconductor. But that's kind of a double-edged sword if you think about it because on one hand that has allowed them to create dominant advanced chips, compete in the data center market and all of that stuff.

And that is one of the reasons that they've had as much growth as they've had recently.

But on the flip side, it's kind of a double-edged sword from the standpoint that all of their chips are running through Taiwan Semiconductor. It's all running through one company in a, let's say, a contested geopolitical situation, right?

They're all out of Taiwan. Everything AMD's is doing is running through there.

So I mean that I right now it doesn't look like it is a problem but I could see it potentially being a problem at some point down the line. looking at the revenue growth at the revenue chart here we can see growth has been very good.

Now the past couple years has really shifted the way this chart looks. If you think about the past 2 years, you look how much that has ramped up. It has significantly improved over the past couple years.

Before that, they were doing well coming off of, let's say, 2015, 2016 lows. They've done fairly well over the past decade. But in the past two years, things have really ramped up.

Then when we jump over and look at net income, well, we can see here that net income doesn't have quite the same trend that revenue had. So net income, let's just say it's a bit more volatile.

Now, part of this makes sense because chip manufacturers have has generally been a cyclical business where it es and flows as companies spend more money or reduce spending. And you can see that has very much held true.

That's why we have that that line there as a three-year average. And you can see it's kind of wavy. That points to the cyclicality of the business.

But in the past couple years, numbers have once again ramped up thanks to all the money that they're doing with data centers. But I was a little surprised when I was doing my analysis and I saw this chart here because the ramp up in 2021, first of all, that no, those numbers were exaggerated a bit because they had some one-off tax items that made net income look a bit better.

So that jump looked a bit higher than it really was.

Then in 2022, they actually made an acquisition of XYlinks. So, this is another company that they that had pretty good margins that the CEO came out and said that they were uh that they were excited about this acquisition and it should help their overall business, improve profit margins, things like that.

We'll look at that in a second. But there were some temporary hits with that that made their numbers in the years after that 2022 2023 there were some amatized costs that they were tied to that acquisition that again pulled down those numbers a bit.

So I do think it's important to recognize yes there's volatility with this net income here and part of that is a cyclical reason but the other part is that the numbers were a bit exaggerated when you go yearbyear they were perfectly explainable by logical one-off items.

Then when we slide over and look at net income margins well here we can actually see the story a bit better. So again big jump uh do some some one-off items in couple years ago 21 or you know 2020 2021 then there was a big pullback then they made the acquisition and in the years since then net income margins has ramped up a decent amount

now xylinks from what I from the research I found had profit margins are in the 3540% range which is much higher than what AMD was showing but AMD's is shifting a bit higher again which is fairly good.

Uh by the way data center margins I believe are decent as well.

So we're going to dive into this a bit further as we get closer as before we try to come up with the fair value when we stop and look at some of the interesting news that has been coming out with around AMD.

But before we go we go any further let's look quickly at shares outstanding. So I just wanted to point out that Xylink's deal was an all stock deal where they issued a bunch of shares and you could see that where a lot of companies, a lot of big companies, this is a big company and usually those companies are buying back stock.

This company, if they are buying back stock, they're not buying back much of it or they're issuing more shares than they are buying back.

Now it has flattened out over the past couple years. So great from a from an investor standpoint. Okay, now let's jump over and look at their cash and their debt. So, first let's jump and look at uh debt and uh short and long-term debt.

So, we can see here that debt over the past couple years has ramped up and they got about 3.3 billion in debt.

But when we overlay this chart with cash and cash equivalents, well, here you can see that they have far more cash and cash equivalents than they do have debt. So, I'm not at all worried about their debt.

Okay, that being said, let's jump back to the revenue chart because I think that the revenue chart is important to help us tell the story. Okay, so we know revenue has been climbing and it's been climbing impressively. There's no denying that.

But one of the bigger concerns that I think that we could have as an investors is that some of these deals are not traditional types of deals. So for example, AMD and Meta have agreed to a 6 billion a 6 gawatt data center. So it's worth about a hundred billion dollars.

Uh they've done the same thing with Open AI. They have a deal with Enthropic. AMD has a deal with Enthropic and they're actually AMD is investing $5 billion in Enthropic

and but the tricky part about that is that they essentially if you take a company like Enthropic, Enthropic is their customer. So they're investing in that customer and they are giving them chips and then they get revenue in return for that.

But it could really make free cash flow a little bit wonky going out the next few years.

Now as long as the orders keep coming in and these companies, you know, keep paying them and keep staying in business and all that stuff, the the massive amount of growth that we saw in revenue is very likely to stay.

So, with that in the back of our mind, we'll jump over and look at the fair value of what uh AMD stock could be worth today. Now, I'm going to start with forward price to earnings multiple just so we can kind of double check ourselves.

And we can see that right here they're trading at about 43x. So, this is a chart of AMD's 10-year forward price to earnings multiple. We can see that right now it's on the high end. So, I mean, that's not a great thing.

Uh but we saw how volatile net income was. So, I'm actually going to avoid using this for now and instead we'll jump over and look at free cash flow because the real question is, can they turn all of that revenue growth into cash flow?

If they can do that, then it's it'll be far simpler to come up with a good fair value and far simpler for investors to get a good return. Now, we can see that analysts are expecting for free cash flow to ramp up a ton over the next 5 years.

Now, if we just took analysts at bid, if we just said, "Okay, let's assume analysts are correct, and then after that, it's going to grow at our perpetual growth rate. By the way, I'm using a perpetual growth rate of 2 and a.5%."

It's going to ramp up like that, and then we're going to get a perpetual growth rate of 2.5%. Well, with those numbers, the stock will be worth about 25% below where it's at right now.

It'll be about $350 per share. So, as of right now, it would be a bit overvalued.

But I would argue that if you're going to go out 5 years and you're going to really see that kind of growth, the odds of growth just slamming on the brakes and going at 2 1.5% are fairly slim.

So let's extend out our growth rate, our time period a bit. Now we'll go out 10 years. So instead of 5 years, we'll go out 10. The light blue lines here are computer estimates where we start at 15% growth and then it gradually works the growth rate down to 2 and a.5%.

So you can see you got you kind of end up with a smoother roll off here.

Well, with that assuming that is how the future the next decade played out. Well, the fair value right now would be much closer to fair value. Right now, we'd be about fairly valued.

In fact, it would still be about 1% overvalued. Now, the fair value is coming in at about $470 per share.

Now, part of the reason that this stock could be a bit overvalued is it's already gone on one crazy run. When we look at the chart over the past year, we can see this chart is up massive amounts over the past year,

And my biggest hesitation with this is as interesting of a company as this is one there's the red flag with the fact that they don't manufacture their own chips and everything runs through Taiwan semiconductor.

So I mean it works so I can't really argue with the fact that it's working.

The other hesitation is I have some hesitation around these kind of circular deals where you know companies are you know swapping shares for revenue and the problem with that is that yeah you generate revenue but you also dilute investors so that's clearly a concern.

Besides that the stock has already had a massive run. So despite the fact that the stock is up as much as it is, I think I would need a pretty big pullback in this stock to consider investing at this point.

I think that there's too much, let's say, too much perfection priced into this stock already that if the market goes in a different way over the next handful of years, four or five years, if you know spending slows down, which I think I almost think it has to slow down.

If it does slow down more than analysts are expecting, well, you know, this stock could end up seeing a meaningful pullback because of that.