Advanced Micro Devices (AMD) is a company that has had varying fortunes and outcomes over the years. However, the last few years have been a definite downer for AMD as they are clearly moving in the wrong direction. However, rather than leave it to a quick and witty assertion, the author of this report will add some context and support for that statement. This will come in the form of stock price checks, financial statement analysis and other points of analysis relating to AMD’s publicly reported and available information. While no one should be signing AMD’s death warrant as of yet, they really do need to reinvent and restore themselves if they are going to survive in light of continued dominance from Intel and their own personal missteps.
Before getting into the minutia of why AMD is in a spot of trouble, a history lesson about them would be wise to engage in before getting to anything else. Based in Sunnyvale, California and the employer of a shade over 10,000 employees, AMD has been the commonly cited and pointed to alternative to Intel when it comes to computer processors. Intel and AMD are certainly not the only players in the processor game but they are certainly the two biggest proverbial dogs in the yard. Their products include the A-Series, the E-Series, the FX, the Athlon, the Sempron, the C-Series, the Z-Series, the Phenom, the Turion, the Opteron and others. They also own outright one of the two major video card producers in the world, that being Radeon. Like AMD, Radeon has a single major competitor of its own, that being NVidia (Yahoo, 2014).
The primary question that will be answered in this report is whether AMD will remain financially viable over the next few years or decades. The short answer is that things do not look good. However, the answer is and should be more verbose and detailed than that. When looking at AMD’s financial statements over the last few years, the news is pretty bleak. The company had about $6.6 billion USD in revenue in 2011. However, that number fell to $5.42 billion in 2012 and $5.30 billion in 2013. Gross profit has remained positive but has also fallen as it was $2.94 billion in 2011, $1.24 billion in 2012 and $1.98 billion in 2013. When looking at operating income profit or loss, it has never been more than $400 million over the last three years. It has been positive twice (in 2011 and 2013) but was in the red by more than a billion in 2012. Total assets, per the balance statement, fell by nearly a third from 2011 to 2012 but recovered by about half in 2013. Liabilities are a little jumpy but have fallen over the last two years and are not even a third of revenues. The cash flow has hemmed and hawed from $320 in the black to the exact opposite in the red (Yahoo, 2014).
When looking at ratios, a few things come to light. First, earnings per share is negative but it is not nearly as bad it was in 2006 and 2007. The number of stock shares outstanding is the highest it has ever been and it was remained above 700 million since at least 2010. Book value share is very low compared to the last ten years overall and the operating margin for the company is also quite thin. However, it is not nearly as low as it was in, let us say, 2007 and 2008 where it was -47.6 and -33.7, respectively. The gross margin for AMD is actually quite good and has remained in the 30’s and 40’s for all of the last year except for one outlier in 2012. It was 22.78 that year but has since raised to 37.33 in 2013. Return on assets is negative but it still far ahead (more than twenty points) from where it was just a year ago and the current value (-1.99) is not a far cry from where it was in 2009 and 2010 (Morningstar, 2014). When looking at the DuPont analysis over the last few years, net margin is fairly poor and asset turnover has spiked over 100% in the last years. Asset/equity has taken a strong dip and then risen back to where it was over the last few years. In 2010, it was 7.5 and then it dropped to about 3 in early 2011. It has since gone all the way up to about 9 but has since leveled off and is now about 8 (StockPup, 2014). When it comes to the stock price itself, the overall trend is not abysmal but it is not nearly as optimal and performing as would likely be preferred. AMD stock took a sharp uptick in late 2009. Since then, it has jumped up and down quite a bit but the overall trend has been down. The valley seemed to come in late 2012 and there was an eventual general rise and plateauing after that with the rise occurring mostly in early to mid-2013 and the plateau lasted through mid-2014. Since that point, the price has fallen from four dollars a share to where it is right now at just more than $2.50 (Yahoo, 2014).
In total, what follows is a one-by-one recitation of the ratios and performance measures that AMD is at as of the end of 2013. Their overall revenue, as noted before, was $5.299 billion. They had a gross margin of 37.3, operating income of $103 million, an operating margin percentage of 1.9%, net income of $83 million USD, earnings per share of -0.11. They had no dividends and no payout ratio. Their outstanding shares sits at about 754 million. Their book value per share is 0.75 and their operating cash flow is negative $148 million. They have cap spending of -84, free cash flow of not quite a quarter billion in the red and their free cash flow per share is -0.31. Their working capital is $1.266 billion.
The cost of goods sold, in terms of percentage of sales, is 62.67% as of December 2013. Percentages for SG&A were 12.72 and R&D was 22.66. There was no amount for anything else. Net interest income & other was a scant -3.34. Their tax rate was non-existent for 2013 and their net margin was -1.57. Asset turnover was 1.27 (127%) and their return on assets as a matter of percentage was -1.99. Financial leverage was 7.97 and the return on equity was -15.34%. Return on investment capital was positive as it was 2.80 and their interest coverage was 0.58. Year-over-year revenue is negative, although it went from -17.45% in 2012 to -2.27% in 2013. The current figures for 2014 are quite positive as they are 24.12% at this point. Due to the losses, net income and earnings per share are not charted (Morningstar, 2014).
Their current ratio as of December 2013 is 1.78, their quick ratio is 1.19 and their financial leverage ratio is 7.97. Their debt/equity ratio is 3.67. The beta for AMD at this time is 2.63. Given that anything above a 1 means the price will be more volatile than the market, that number is rather high. By comparison, Intel’s Beta at this time is 0.93. NVidia, the aforementioned ancillary competitor as they compete with part (but not all) of AMD’s offerings is in the middle at 1.75. The high stock price over the last five years has been about ten bucks a share. This value occurred in mid-2010. Since then, there have been a few times where it came close such as two parts of 2011. However, the latter part of 2011 represented a fall. 2012 showed a rise back up but the peak was a smidge over 8 bucks a share. It since nose-dived until bottoming out in late 2012 and stayed that way until the middle of 2013. The price shot up about two bucks a share, a doubling, and has since been at four bucks a share for more than a year. It was that way in late 2013 and has remained that way since until tapering down to 2.68 in the last few weeks. The lowest price overall was less than a buck. The range over the last year (through late October 2014) has been from 2.54 to 4.80. As such, AMD is certainly near its lowest point right now when comparing to that range. Their profit to earnings ratio is currently 40.71. Their stock price has gone the opposite direction from the Down since mid-2012 as the Down has shot up over that time frame while AMD was in freefall from about April 2012 to about October 2012. Since then, AMD has mostly risen but nose-dived again since the start of 2014. The larger market has dipped at times as well but never remotely to the extent that AMD is doing so. When comparing to Intel, there is no correlation between the two graphs. Intel has done their own caterwauling in terms of stock price. However, from 2009 to 2012, it never varied more than twenty percent from its baseline and when it did in 2012 and then again in 2014, the trend was sharply up. Intel has been negative over the last five years, but only briefly in 2010 and 2011 and for a very brief times in 2012. Other than that, the trend has always been up, much like the wider market. NVidia and AMD were very much in sync through 2010 and 2011 in terms of percentage swings but they have since diverged starting from mid-2012 onward. NVidia has taken a steady swing upward while AMD took a massive dip that they have not yet recovered from through October 2014. They were hanging at 20 to 40% in the negative over the last year or two but there has since been a marked dip to more than negative fifty percent within the last two to three months (Google, 2014).
In terms of observations and, by extension, a final recommendation, the author of this report has a few thoughts. Of course, these all fall under the prism and rubric of whether a partnership with AMD would be wise at this point. While AMD is not in danger of imminent failure, they have some problems. They very much mimic the way Sprint is performing right now. They are both definitely “upper crust” in terms of market positioning and revenues. However, they both possess systemic problems that will have to be addressed fairly soon if the long-term viability of the firm is going to hold up. Another cross-industry comparison can be made to companies like Borders Bookstores and Circuit City. Even though those two companies only had one major competitor each in terms of brick and mortar stores (Barnes and Noble and Best Buy, respectively) they both ended up dying as corporations (and indeed, Circuit City had to be liquidated because nobody wanted to buy them) because there was not enough room for both. Many say that Intel needs a competitor to keep them motivated and honest. This is something that has been said or is being said about AT&T (before it was broken up), Microsoft and Apple. However, AMD is in much more danger of destroying themselves and Intel is going to be just fine given their current state. Given the above, the analyst and author of this report simply cannot recommend partnering with or relying on AMD because they simply are in too much danger of becoming obsolete within the next five to ten years.
AMD seems to be doing fairly well over the last year or so given its most recent performance metrics. However, they’ve done that in the last ten years and they then faltered. If AMD can prove that their improvements in the last 12 to 24 motnhs are real and not just another aberration, then investment and partnership with AMD would make a lot more sense. Indeed, that is probably why AMD is faltering and jittering as they are as many firms probably would like to trust AMD but their overall body of work makes people nervous. Indeed, the wider United States economy seems to be acting much the same way. Regardless, AMD will probably be fine but they have some proving to do.
Google. (2014, October 26). Google Finance: Stock market quotes, news, currency conversions & more. Google Finance: Stock market quotes, news, currency conversions & more. Retrieved October 26, 2014, from http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maxi mized&chdeh=0&chfdeh=0&chdet=1414377337002&chddm=490314&chls=Inter
Morningstar. (2014, October 25). Advanced Micro Devices Inc. Growth, Profitability, and Financial Ratios for (AMD) from Morningstar.com. Retrieved October 25, 2014,
StockPup. (2014, October 26). ADVANCED MICRO DEVICES INC (AMD). Advanced
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Yahoo. (2014, October 26). Advanced Micro Devices, Inc.. Yahoo! Finance. Retrieved October 26, 2014, from http://finance.yahoo.com/q?s=AMD