More than a decade has passed since AMD (NASDAQ: AMD) It spun off its semiconductor manufacturing segment, the company now known as GlobalFoundries. During the depths of the Great Recession, the deal was deemed necessary to help AMD survive, although AMD upheld the long-term vision of refocusing on technology, chip design, and better investment returns. The latter turned out to be true.
While it was a bumpy road, AMD’s stock has increased more than 2,000% since the beginning of 2009. And while it generally still plays a second fiddle for Intel (NASDAQ: INTC) and NVIDIA (NASDAQ: NVDA), at least in terms of market share, the former in CPU (general purpose computing processor units) and the latter in GPU (for graphics and other specialized computing processes such as AI), has made great technological advances and has been giving his two older teammates a run for their money.
Is it a millionaire action?
At this point, AMD is a big chip company in its own right. Now with a market capitalization of $ 60 billion, it could have been listed as a million dollar equity investment portfolio a decade ago when trading for pennies compared to the current AMD dollar. But those were different times for this underdog chip.
Image source: AMD.
However, the chip industry is massive. Global spending on technology building blocks reaches hundreds of billions and is still in growth mode. Additionally, Intel and NVIDIA have valuations of $ 250 billion and $ 229 billion, respectively. So there is plenty of room for the smallest company to make some headway.
Powerful forces are driving growth
But AMD is not simply growing up picking up debris from its larger peers. In fact, it can be argued that AMD’s CPU line is superior. And while NVIDIA charges a premium for its advanced GPU hardware for a reason, even NVIDIA has used some of AMD’s wares in its designs (as with DGX A100 data center units, which use two AMD EPYC server processors) . Also, while NVIDIA released the next-generation ray tracing game graphics a couple of years ago, AMD’s own ray tracing enabled GPUs will power the new Sony Playstation 5 and Microsoft Xbox Series X.
And even if the cloud-based video game stream takes off and kills the game console (unlikely), AMD won’t be out in the cold here either. Its chips are helping to power some of the data centers that carry heavy graphics uploads to the cloud. Simply put, despite AMD’s revenues having skyrocketed in recent years, the computing power for businesses and consumers is still in the midst of a major update cycle. There could be a lot left in the tank for AMD.
But is it a purchase now?
Okay, the problem with the semiconductor industry is that while it’s technology, it’s also manufacturing. And manufacturing companies are cyclical in nature. Managing that cycle and maintaining growth can be a tough nut to crack, one that AMD hasn’t historically discovered, even after its divestment from GlobalFoundries and its focus on design. While sales have grown overall in the past two decades, it has been an especially wild ride.
YCharts data.
Is this time different? Maybe it is. In addition to the highly cyclical nature of its business, I have always shunned AMD for its lack of profitability. Free cash flow (basic earnings that are added to or subtracted from the balance sheet, calculated as income less operating cash and capital expenses) has been negative most of the time in the last two decades. But in the last 12 months, $ 431 million has been positive. With $ 7.25 billion in revenue over the same period, that’s good for a 6% free cash flow profit margin, not a fantastic rate, but positive free cash flow is important. It means that a chip company is capturing enough dollars to reinvest in research and development, helping it sustain innovation and, in turn, sales growth over time.
AMD has also improved its balance sheet, paying down debts (up to $ 488 million at the end of March 2020) and increasing its cash and cash equivalents (up to $ 1.39 billion). AMD is in better shape than it has been in a long time.
Is this semiconductor company a million dollar share? Given its size, probably not. Worthy of being included in a technological growth portfolio? Yes, although my choice is NVIDIA with its innovation rate running in overdrive, big profit margins and deep pockets. But if it was for Intel or AMD, I would go with AMD in the long run. Just wait for a roller coaster of this historically volatile, low-profit chip stock.
