Is AMD Stock The Next NVIDIA?

Has AMD already had its Nvidia moment, or is it poised for even greater growth?

By Paul Gabrail | Wednesday, July 17, 2024

Have you been keeping an eye on AMD lately? It's been quite the ride. In just the last month, AMD's stock has shot up by 14%, and year-to-date, it's up a whopping 31%. That's not all—the company has been on an acquisition spree, recently buying Silo, its third AI company this year. Silo is a leader in cloud and embedded AI, which positions AMD strongly in the burgeoning AI sector.

Many investors are drawing comparisons to Nvidia, hoping AMD could replicate Nvidia's stellar growth. Currently, AMD's stock is trading at around $181 per share, not far from its all-time high of $227 back in March. If you look at AMD's historical chart, it's astonishing how far it's come. Back in 2015, it was trading for just a dollar. That's a staggering increase of 150 to 200 times in just nine years.

But the big question remains: has AMD already had its Nvidia moment, or is it poised for even greater growth? Remember, Nvidia's big surge started when its market cap was around $30 billion. AMD's currently stands at $23 billion. There's room for growth, but there are challenges too.

One concern is AMD's price-to-free-cash-flow ratio, sitting at 255, and its price-to-earnings ratio, which is at 266. These numbers are sky-high, but if AMD can boost its profits significantly like Nvidia did, these ratios might become more justified.

Speaking of competition with Nvidia, AMD has a gross profit margin of 47%, while Nvidia enjoys a hefty 75%. There's a significant margin gap there that AMD could potentially capitalize on by undercutting Nvidia in pricing while still delivering quality chips.

On the financial side, AMD's revenue growth has been impressive: 26% annually over the last three years, 30% over the last five years, and 15% over the last decade. Free cash flow has been keeping pace with net income, which is a positive sign.

However, one glaring issue is the increase in AMD's outstanding shares by 34%. This move dilutes the value of existing shares, indicating management's approach to fund growth by leveraging the high stock price rather than taking on debt.

Despite these concerns, analysts are bullish on AMD's future. Earnings per share are expected to nearly triple in the next four years, and revenue growth forecasts are equally robust.

Let's dive into the stock's valuation. With a market cap of $298 billion and an enterprise value of $303 billion, AMD's net debt is minimal, reflecting a strong balance sheet. However, the price-to-free-cash-flow ratio over the last five years is 162, lower than the PE ratio of 180, which could suggest the stock is somewhat overvalued.

When we apply these metrics to the eight pillars of stock analysis, AMD shows a mixed bag of results—four checks and four Xs. Revenue growth, net income, and free cash flow are up, which is promising. But the issue of diluted shares and high valuation raises concerns.

AMD's recent acquisition of Silo, a leader in cloud and embedded AI, adds another dimension to its growth strategy. This move underscores AMD's ambitions to compete head-on with Nvidia in the lucrative AI chip market. While Nvidia currently dominates with a 75% gross profit margin, AMD's entry with a 47% margin could potentially disrupt Nvidia's hold, especially if AMD leverages its competitive pricing strategy.

Now, let's talk numbers. Using the stock analyzer tool, I made some projections. With assumptions on future revenue growth, profit margins, and discount rates, he estimated AMD's intrinsic value. Given the current market price of $181 per share, my analysis revealed a mid-range of $80.

While AMD's story is compelling with its rapid growth and strategic acquisitions in AI, investors must weigh the risks of high valuation and share dilution. The next few years will be crucial in determining whether AMD can continue to outpace expectations and deliver substantial returns.

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That's it for now on AMD. Stay tuned for more updates on our investment strategies and insights into other promising companies in our portfolio. Thank you for your time!

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