2nd Best Stock Pick Is Up 45.2% Since July 2020
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.
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.
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.
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.
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.
As of this writing, Xilinx IS NOT a great stock to consider buying after its 45.2% rise upon buyout.
- It has enormous competitive advantages.
- It earns massive profits and cash flows.
- It dominates its industry.
- Its cheap.
- And it pays you a large and growing dividend.
AMD saw these things which is why its buying Xilinx for $35 billion… And driving it far above the price I would recommend you buy at.
However, these are the exact kinds of stocks you must consider buying right now with the various risks in the market that I’ve talked about at length in the last few weeks.
If you’ve missed any of those articles, here are the main risks I’ve talked about at length the last few weeks.
- Stock market valuations at or near all-time records.
- Inflation is rising rapidly.
- Debt levels continue to go straight up and now sit at a combined $281 trillion worldwide.
- Interest rates are rising.
- Unemployment is rising again…
- And so are Covid cases and deaths.
It’s not just one large risk out there right now… There’s many… And almost no one else is telling you about any of this.
Because of all the risks out there right now, I sent you this article in case you missed it.
And I hope you bought Xilinx stock to protect your retirement portfolio back in July 2020 to protect your retirement portfolio.
Tune in tomorrow to see the best pick that is up 114.5% since July 28th 2020 when I first recommended you buy it.
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.