STOCK PITCH AMD. (Advanced Micro Devices) Stock Summary

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Bryan Holt
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1 STOCK PITCH AMD (Advanced Micro Devices) Stock Summary Share Price (current) $10.16 EPS -$0.6 $0.66* Market Cap. (2016) $9.47B Shares Outstanding 835M 940M* Net Debt (2016) $1.43B EBITDA -$372M $747M Excess cash (2016) TEV (2016) TEV/EBITDA (2016) * Calculations shown in Page 4-7 $1.26B $9.64B NA Share price (All time High) $45 $45 I recommend to long the shares for AMD, with a possibility EPS to rise to $0.66 by 2020, a great improvement from the current scenario. Description Advanced Micro Devices, Inc. (NASDAQ: AMD) is an American multinational semiconductor company. It develops microprocessors, Accelerated Processing Units (APUs), Graphics processors and related technologies for commercial as well as consumer markets. The major consumers of AMD are Sony Corporation, Microsoft Corporation and HP Inc. AMD produces its products in 2 segments: 1. Computing and Graphics - x86-based microprocessors and chipsets - GPU (Graphics Processing Unit), APU (Accelerated Processing Unit), SoC (System on chip) and commercial chipsets. The GPUs are mainly for consumer and commercial use 2. Embedded, Enterprise & Semi-custom (EE&S) - in this segment, AMD basically produces chipsets for servers, embedded systems and for semi-custom usage. Investment Thesis AMD stocks come with a risk, as with any enterprise AMD has certain negative factors which can drive down its share prices to lower level. The major risk involved here is due to the past performance of the company. At IPO in 1972, the initial share price was $15, and shares issued were 525,000. There were some peak times when the share prices were close to $45 but the past 5 year data shows us this:

(Source: Investopedia) The share prices were more or less flat, but started going up from the last quarter of 2016.

16 On the Financial Analyst Day of 2017, AMD revealed its 4 long term financial priorities, which are: a. Revenue Growth b.

2 (Source: Investopedia) The share prices were more or less flat, but started going up from the last quarter of Since then it has traded at maximum close to $15, the current price being $10.16 On the Financial Analyst Day of 2017, AMD revealed its 4 long term financial priorities, which are: a. Revenue Growth b. Gross Margin expansion c. Consistent profitability d. Strong balance sheet With these announcements from the company, there seems to have some positives in the financials, which can be evidently seen in the comparison of financial report of Quarter ended April 1 17:

3 Financial Projections (The calculation of the data are shown in the images of Google worksheets uploaded below, These worksheets have been worked upon by me, and can be granted access in original) CPU/APU market: AMD faces a stiff competition with Intel, the semiconductor giant in the CPU/APU market. Intel is the largest enterprise when it comes to semiconductor chips, particularly in x86-based microprocessors. The introduction of new range of microprocessors by AMD has shown a significant change in market sales in Germany. CPU Sales 2017 (Germany) (Data: Mindfactory, a German retailer) AMD Intel March ' % 72.4% April ' % 63.5% May ' % 57.8% June ' % 52.4% July ' % 51.3% August ' % 43.9% Overall CPU Market shares (Quarterwise) (Data: PassMark) AMD Intel Q % 81.9% Q % 79.4% Q % 69% Discrete GPU Market: The overall global market GPU sales (as of Q3 2017) increased by 29.1% Q/Q and 21.5% Y/Y. In the discrete GPU market, the only competitor of AMD is Nvidia. Here the market shares are: Discrete GPU Market shares Q Q Q Q Q Q AMD 27.20% 29.80% 30.30% 29.90% 27.50% 29.40% Nvidia 72.80% 70.20% 69.70% 70% 72.50% 70.60% Consolidated Market projections: Quarter-wise Market shares - AMD Q Q Q Computing and Graphics CPU/APU 20.6% 31% 19.40% discrete GPU 27.50% 30.30% 29.90% EE&S* * Data insufficient to calculate

4 P&L calculations and assumptions According to a report by ReportLinker, the global semiconductor industry is valued at $463.5 Billions (2016), and is estimated to grow at an average CAGR of 7.67% from the current period to Given the company s great range of new products launching, with increased sales performance (as witnessed in Germany market data), let us assume the market share which AMD occupies would rise at an average CAGR of 10%. Year World market 2016 $464 Growth rate AMD market share 0.92% growth rate assumed AMD revenue Gross margin $4 23% 2017 $ % $5 26% 2018 $ % 1.11% 10% $6 28% 2019 $ % $7 32% 2020 $ % $8 35% The company targets gross margin to reach ~40% by 2020, which stands at 23% in Let us make a safe assumption that the margin reaches 35% by For R&D and marketing, general and administrative costs, the growth rate is taken as an average of individual percentages of revenue of last 5 year data. This average comes out to be 22.89% for R&D, and 12.34% for Marketing, general and administrative. This R&D and MG&A will be applicable for, say 2 years till 2018, then we would be having a constant rate, at about $1400 millions for R&D and about $800 millions for MG&A. The sample calculation is shown: Dec 29, 2012 Dec 28, 2013 Dec 27, 2014 Dec 26, 2015 Dec 31, 2016 Net revenue R&D R&D/Revenue 24.97% 22.66% 19.47% 23.73% 23.60% Average 22.89% MG&A MG&A/R&D 15.18% 12.72% 10.97% 12.08% 10.77% Average 12.34% The other data which hold very small relative value (<10%) as compared to revenue generated are assumed to be constant equal to average of previous data for all the projected years. The interest expenses will considerably reduce over the years since the debts would be cleared with increasing profits, this can be seen in the Cash Flow statement data of previous 5 years. The net shares outstanding are assumed to increase at a constant rate equal to the CAGR of previous years data, which comes out to be 3%. Go through the P&L statement:

Balance Sheet calculations and assumptions All the projected calculations (except par value of stock), it is assumed that the value for the upcoming years is

6 Balance Sheet calculations and assumptions All the projected calculations (except par value of stock), it is assumed that the value for the upcoming years is equal to be a constant equal to the average value of previous data (due to time constraints). The par value of a stock is assumed to be at $9. Have a look at the sheet:

7 The projections for the balance sheet are actually calculated by making fixed assets schedule, debt schedule and working capital schedule. However, here the projections are made by assuming the average rate over the past 5 years data as a constant. Cash Flow calculations and assumptions D&A is assumed to decrease at a constant rate equal to the CAGR of previous years data, which comes out to be 15.33% down. Relatively very small values are assumed to be zero. Consider the Cash Flow sheet:

8 Valuation Since AMD has underperformed, as is evident from the past 5 year data comparison of TEV/EBITDA of AMD vs overall semiconductor equipment industry, let us assume the semiconductor industry has TEV/EBITDA multiple of ~13x in the coming years, and AMD performs with a multiple of 8x. Consider the below sheet:

9 Risks and Catalysts Catalyst - Artificial Intelligence market is expected to rise to $16B by There are news that AMD is working with Tesla to develop AI chips for self driving cars, this is a great opportunity unfolded for AMD. MarketsandMarkets report says this market to rise with 5.8% CAGR from Catalyst - PricewaterhouseCoopers (PwC) expects industrial semiconductor growth of CAGR 9.7% from 2014 to This may prove to be a great benefit for the whole of Semiconductor industry, and $60B market of industrial semiconductors. Risk - Traditional PC market is shrinking, this market is one of the major revenue stream for chips (CPU/APUs and GPUs). Risk - Due to the increasing shift towards cloud computing, the need for efficient servers and data centres is increasing. The brand which invests more on R&D develops further. Each of Intel and Nvidia has much larger funds to deploy towards these activities, so AMD should take its stance and employ funds efficiently to emerge big. Risks - Large amount of data needs security, this is a huge risk for the market. Risk - Internet of Things (IoT) is a new market which needs to be tapped. Major companies are getting on this market, so if AMD does not embark in this industry, there is a risk of losing market share. McKinsey reports IoT is $8B in 2017, and is expected to touch $30B by Further risks/catalysts need to be noted. Conclusion AMD has a huge potential in itself, it just needs to keep meeting its targets, and work disciplined. There are risks involved in the process too. This potential can make the EPS rise to $0.66 from its current value -$0.08 (-$0.6 as of Dec 31, 2016). What I argue here is that AMD can as well change the market trends and come out highly profitable. Even though the investors since the inception have not broke-even by now due to its share prices, there is a possibility that AMD stakeholders can double their invested capital in the coming years. Note: These analyses are done to the best of the time available to me. If given more time I would have: properly calculated balance sheet future projections by making fixed assets schedule, debt schedule and working capital schedule; would have evaluated P&L, Cash flow and valuation more thoroughly; would have gathered better information of the industry and the company and competition; would have modeled risks and catalysts in the calculations; would have took care of grammatical mistakes among others. Thank you, Lokendra Verma , IIT Bombay, India lokendraverma04@iitb.ac.in lokendraverma04@gmail.com

September 29, Net revenue $ 1,653 $ 1,756 $ 1,584 $ 5,056 $ 3,913. Marketing, general and administrative

September 29, Net revenue $ 1,653 $ 1,756 $ 1,584 $ 5,056 $ 3,913. Marketing, general and administrative CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Millions except per share amounts and percentages) Net revenue $ 1,653 $ 1,756 $ 1,584 $ 5,056 $ 3,913 Cost of sales 992 1,104 1,013 3,146 2,578 Gross margin