Advanced Micro Devices (NASDAQ: AMD) is a semiconductor company specialising in the development of computer processors and related technologies for business and consumer markets. The company was founded in 1969 and is headquartered in Santa Clara, CA.
As of 28 Mar 2022, the company's stock is trading at approximately $118.34 and year-to-date (YTD), it is down by 21%. Over the past 12 months, the stock is up by 53%, whilst the S&P 500 is up by 16%, meaning the company's stock has performed better than the broader market by approximately 37% over this period.
Is AMD worth considering as a 'buy and hold' investment? Let’s take a closer look at the company's fundamentals to find out.
Why is fundamental analysis important?
‘Fundamentals’ are a set of key metrics which can help you, as an investor, assess the financial health of an organization as well as its growth prospects. Over the long term, the price of a company's stock is usually tied to its fundamentals. It makes sense then to start by analysing these when we are considering if it has the makings of a good long-term investment.
There are a number of fundamental metrics to look at, but the ones we'll focus on are price to earnings ratio (P/E ratio), price to book value (P/BV), price to sales ratio (P/S ratio), earnings per share (EPS) and debt. When they are analyzed together, these metrics can start to 'paint the picture' and help you understand if a company is a solid investment.
With this in mind, let's take a look at AMD’s fundamentals and see if they can tell us anything about the company’s potential as an investment opportunity.
AMD stock: the key metrics
First, let's look at AMD's EPS, which serves as an indicator of profitability. This metric is calculated by taking a company's net income (after dividends on preferred stock) and dividing this by the number of outstanding shares.
AMD's EPS is 2.6 according to its most recent financials, and this increased by 25% year-on-year, which is a positive sign.
Analyzing a company's price to earnings (P/E) ratio is also helpful because it tells us how cheap or expensive a stock is, or how much of a premium investors are willing to pay for its earnings. It is calculated by taking the price of a stock and dividing this by the EPS. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates the opposite.
Based on its most recent financial statements, AMD has a P/E ratio of 46.5. This is 63% higher than the average P/E ratio across its industry (which is 28.5) and indicates that the stock is relatively expensive in relation to how much it earns.
Next, let's look at one of the most common valuation metrics - the P/S ratio. It is calculated as the current price divided by sales for the previous 12 months, and helps us get a sense of how much investors are willing to pay for a company's revenues on a 'per dollar' basis.
Based on its most recent financial data, AMD's P/S ratio is currently 8.9. This is 21% higher than the sector-wide average of 7.4. The fact that it is currently above the sector-wide average isn't particularly encouraging, and indicates that the stock may offer less value compared to other companies in the same sector.
Next, let's look at AMD's price to book value (P/BV), which tells us how much investors are willing to pay for a company's assets. P/BV is used by value investors to identify potential investments, and is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book').
According to its most recent financial statements, AMD's P/BV is 19.3, and this is 193% higher than the average across the industry, which is 6.6.
Finally, when analyzing an investment opportunity, you should always take a look at how much debt a company has on its books, as this can help you assess how risky it is as an investment. Carrying a large amount of debt can be a red flag if the company is not generating enough free cash flow to service the debt.
Advanced Micro Devices has total debt of $732m as of 28 Mar 2022, and this has increased by 28% over the past year. Adjusting for $3.61bn in cash & short-term investments, the company has a 'net debt' of $-2.9bn.
Based on these figures, AMD's current levels of net debt don't worry us, as the company generates enough revenue to service its debt, and is not using debt to fund their operations, which is good to see.
Is AMD a buy?
All in all, we’ve noticed some worrying trends at AMD.
Specifically, the stock is down by 21% YTD and is underperforming the broader market YTD. Also, compared to companies in the same sector, AMD has a higher P/E ratio, higher P/BV and higher P/S ratio. This just doesn't give us confidence that the company is on the right track.
Whilst we can't ignore the fact that the stock is up by more than 50% over the past year, we're just not sure that AMD is doing enough to deserve a spot in your portfolio right now, but it may be worth adding to your watchlist to keep an eye on in the future.
As with any stock however, there are additional factors to consider before making an investment decision. This analysis is general in nature and based on historical data, and it does not take into account your specific investing objectives or financial circumstances. Additionally, this article does not look at the macro environment where geopolitical headwinds, internal company changes and individual technicalities in the way a company conducts its business can have a significant impact on a company's long term outlook. Please do your own due diligence before deciding to invest.