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Is AMD A Buy After Profits Jump 948%?

In the last few months, I’ve written 2 separate articles telling you to avoid investing in AMD stock until its cheaper…

And 3 more detailing the recent AMD acquisition of Xilinx.

Today, I give an update after it released its latest earnings and answer – Is AMD A Buy After Profits Jump 948%?

You can read the past articles in full using the links above.

But if you don’t want to; here’s a quick recap before we get to today’s update.

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From Article #1 Linked Above

Normally in these articles I talk about profitability, cash flow, the affects coronavirus is having on a company’s financials among other things.

But frankly none of those matter with Advanced Micro Devices (AMD) due to its huge valuation.

AMD designs and produces microprocessors mainly for the computer and gaming markets.

Its market cap is $106 billion.

And in most markets, it’s in second place – by a wide margin – to Intel (INTC) in these microprocessor arenas.

In most microprocessor industries Intel owns between 75% and 90% market share.

While AMD owns between 10 and 20% market share.

As of this writing AMD’s valuations are as follows…

  • Its P/E is 174.7.
  • Its P/CF is 125.7.
  • And its forward P/E is 83.3.

I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…

AMD crushes this threshold.

Why below 20?

Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.

When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.

This also means you have a much higher probability of earning higher returns owning its stock over time.  And these combined make the stock a less risky investment.

With AMD stock being so overvalued it means there is no margin of safety… That you have a far lower likelihood of making money owning its stock over time.  And these make the stock riskier.

This massive overvaluation is unsustainable unless AMD completely overtakes Intel as the #1 producer in the world of microprocessors.

And I don’t see that.

Intel makes far more money, has enormous market share that dwarfs AMD, it invests far more into its operations, and has far larger competitive advantages than AMD.

And even though Intel will have some short-term issues because of its inability to get its next generation chips out on time… I don’t see AMD flipping the script 180 degrees on Intel and taking their throne as the world’s microprocessor king.

At its current valuation that’s what it would take to keep up with its rising share price.

For this reason of its huge valuation I recommend you stay far away from investing in AMD.

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From Article #2 Linked Above

Xilinx (XLNX) is the creator of and still “a leader in the field-programmable gate array (FPGA) industry.

FPGA’s are hardware circuits that someone programs to carry out one or more operations based on the programming language that’s been input.

Think of these like CPU’s in a normal electronic device but they allow much more functionality if you expect things to change at all in an industry.

And things change fast in the tech arena, so these are becoming even more popular.

One area is artificial intelligence (AI).

Say traffic get to 100% of normal levels at an intersection…

If this happens you could program the FPGA to see this with AI, sensors, and data to then help instantaneously make the decision to reroute future traffic elsewhere via GPS signals in people’s cars.  Or by making the traffic lights slow people down so much that they’re forced to go a different route.

This sounds futuristic because it is… But it’s also coming faster than you think too.

Another usage of FPGA’s today is the advanced drive assistance systems or (ADAS) systems in many recent vehicles.

One example is the lane sensor assistance when you go out of a lane or try to merge, and a car is there… If the car “sees” this in its sensors and data, the car automatically jerks you back into your lane or beeps loudly at you so you can do so.

These are ADAS systems already in usage… And they’re built with FPGA’s

Soon when everything is spitting out data and you need to process information fast an FPGA will become ultra-valuable in many situations.

And today I’m recommending you look at Xilinx stock because it’s not only the leader in this arena…  It’s also the creator of FPGA’s.

Over the last 10 years it earned a total of $7.5 billion in total operating profit against a market cap of $24.1 billion as of this writing. And its operating profit margin over the last decade has averaged 30.2% per year.

Its produced $8 billion in total free cash flow in the last 10 years.  And its FCF/Sales margin averaged 31.9% every year in this time.

Plus, it pays an 1.5% dividend just to own its shares.

Xilinx is an amazing company… But it does have one problem right now… Its overvalued.

Its current P/E is 31.7.

Its current P/CF is 21.1.

And its current forward P/E is 34.3.

I consider buying companies that have ratios below 20 on all these, so for now I recommend putting Xilinx on your watchlist and buying it when it’s cheaper.

Not only because it’s a fantastic company now.  But also, because it will benefit greatly from the increased usage of FPGA’s as the Internet of Things continues being built out over the next 20 years.

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From Article #3 Linked Above

This was proved out further on July 30th, 2020 when Xilinx released its 1st quarter 2021 earnings.

EDITOR’S NOTE – Xilinx has a different financial year than most companies do which is why the years seem off.

  • Revenue was only down 14.5% to $727 million in the 1st quarter of 2021 compared to $850 million in the 1st quarter of 2020.
  • Operating profits were down 30% to $176 million in the 1st quarter of 2021 compared to $251 million in the 1st quarter of 2020.
  • And net income was down 61% to $94 million in the 1st quarter of 2021 compared to $241 million in the 1st quarter of 2020.

Xilinx showed enormous resilience in the face of the worst economic issues we’ve seen in 100 years is impressive by itself.

But to add to this the company announced that it bought back 700,000 of its shares.  And paid $92 million out in dividends.

This shows the great business model the company has.  And the resilience of its operations.

***

From Article #4 Linked Above

This thesis to buy Xilinx – when it’s cheaper – continued playing out when it released its most up to date quarterly earnings on October 21st, 2020.

Revenues were up 5% from last quarter to $767 million.

Operating profits rose 17% to $205 million compared to last quarter.

Earnings per share rose 108% to $0.79 per share compared to last quarter.

And free cash flow rose by 22.1% to $232 million compared to $190 million in the 2nd quarter of last year before all this craziness with the virus.

The only bad news here?

It’s still not cheap enough to buy.

Its P/E is now 43.7.

Its P/CF is 24.6.

And its forward P/E is 36.9.

Continue being patient until its cheap enough to buy… I’ll keep you updated when that happens.

***

From Article #5 Linked Above

This thesis to buy Xilinx – when it’s cheaper – continued playing out… But unfortunately, not long enough for us to buy it.

On October 27th, 2020 AMD announced that it was buying Xilinx for $35 billion.

In the first article on Xilinx in July it had a market cap of $21.4 billion.

This means AMD’s paying a 63.6% premium to Xilinx’s July share price… When we already said it was overvalued.

What does this mean?

Xilinx and its shareholders are getting a great deal to join AMD.

While AMD is overpaying for Xilinx based on its current profitability levels… By a huge margin.

This lowers the chances of this acquisition succeeding in the future… Which lowers the chances of this combination producing high investment returns for AMD shareholders.

For this reason, I’m not upset we didn’t get a chance to buy Xilinx.

Yes, it sucks we missed out on a 63.6% return in only 4 months.

This is why you need to keep your emotions out of investing though…

Because there’s no way we could have known this was going to happen back in July.  So, we shouldn’t let it affect the logical decision we made then to stay away.

I’ll keep you updated as necessary on this transaction as needed… But for now, avoid AMD due to its still enormous valuation… And now also for its massive overpaying for Xilinx.

***

This thesis to avoid AMD until its cheaper continued to play out after it released its most up to date quarterly earnings on January 26th, 2021.  Sort of.

  • 4th quarter revenue rose 53% in the year-to-year quarterly period to $3.24 billion.
  • 4th quarter operating profit rose 64% in the year-to-year quarterly period to $570 million.
  • 4th quarter net income rose 948% in the year-to-year quarterly period to $1.78 billion.
  • Full year 2020 revenue rose 45% to $9.76 billion.
  • Full year 2020 operating income rose 117% to $1.37 billion.
  • And full year 2020 net income rose 630% to $2.49 billion.

These aren’t just good numbers… They’re astounding improvements in such a short period.

And these helped rocket AMD shares 76.4% in the last year.

So, was I wrong to tell you to avoid AMD?

No.

Because it’s still enormously overvalued.

Its P/E is now 42.7.

Its P/CF is 99.1.

And its forward P/E is 46.1.

Because its profits rose so much in a short time it’s now not as overvalued as it was when I first told you to avoid its stock back in early September 2020.

But it’s still massively overvalued.

This makes the stock riskier to own… And it also means you should expect to earn lower returns owning its stock if you were to buy today.

And for these reasons I continue to urge you to avoid buying new AMD stock until its cheaper… Even though it posted record earnings for the last quarter and year.

Until then, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.


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