Advanced Micro Devices Additions To Free Cash Flow Will Push It Much Higher
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Advanced micro-systems (NASDAQ:AMD) produced stellar second quarter profits on July 27 and now looks set to profit from its hugely profitable semiconductor manufacturing operations. In addition, AMD has started to generate significant Free Cash Flow (FCF) at very high FCF margins.
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I suspect this will push AMD’s stock at least 31% higher, based on my estimates for next year. This article will describe how this model works.
Meanwhile, AMD stock is already starting to rise. It is up about 17% since the start of the year. In fact, over the past year it has increased by almost 25%. My point is that the stock is likely to move in much the same way over the next year or so.
Where that leaves AMD over the next year
The reason for the rise in AMD Stock is that AMD is producing huge levels of FCF from its existing customers. In addition, its FCF margins are very high and appear to be sustainable.
For example, last quarter, their IT & Graphics segment revenue grew 65% year-over-year (YoY) and quarterly it grew 7%. It represents 58.4% of its total sales of $ 3.85 billion in the second quarter. This implies that over the next year, its sales could grow by 31% over the next year.
However, analysts are now forecasting growth of just 15.8% to $ 18.06 billion for 2022 from $ 15.6 billion for 2021. I suspect its revenue will likely increase by at least 20% (mostly on the 28% QoQ growth rate basis). This brings his sales forecast to $ 18.72 billion.
We can now estimate his FCF for next year. The best way to do this is to use your existing FCF margin for the second quarter and apply it to the sales forecast for the year 2022.
AMD is actually one of the few tech companies to specifically list its FCF on a quarterly basis. This is great because it allows us to easily follow his FCF. And as you know, FCF is what many tech companies now use to measure their ultimate profitability.
The reason is that the FCF is what companies use to pay dividends, buybacks, acquisitions, debt reduction, and cash increases. And remember that this FCF is after all expenses, working capital, and investment needs have been taken care of, leaving it “free” to use the cash flow for these other purposes.
What is the value of AMD stock
In the last quarter, AMD made $ 888 million in FCF, as explained by AMD on page 2 of its second quarter earnings release. Given that its second quarter revenue was $ 385 billion, that means FCF’s margin was 23% (i.e. $ 888 million / $ 3,850 million). This means that for every dollar of sales, 23% of pennies go directly to the net result in FCF.
Thus, the application of this margin of 23% compared to my 2022 sales forecasts (18.72 billion dollars) implies that its FCF 2022 will reach 4.3 billion dollars. This will allow us to promote the AMD share.
For example, AMD currently has an FCF yield of 2.7%. Here is how we represent it. Using its $ 888 million in Q2 FCF, we can estimate that its 2021 FCF will be 23% of the $ 15.6 billion in forecast sales. That involves FCF’s $ 3.588 billion, which is 2.73% of its $ 131.365 billion market cap, according to Yahoo! Finance. This means that we can use a return of 2.73% FCF to estimate its future market capitalization from the 2022 forecast.
Since its 2022 FCF is expected to be $ 4.3 billion, if we divide that number by 2.73% (i.e. $ 4.3 billion / 0.0273), the target market cap will be $ 157.5 billion. This is 20% more than the current market value of $ 131.365 billion.
However, I suspect that AMD stock will benefit from a higher valuation with the increase in FCF. I think his FCF yield will improve to 2.50%. Therefore, its projected valuation will be $ 172 billion (i.e. $ 4.3 billion / 0.025), which is 30.9% more than today’s price.
This means that AMD stock is worth $ 141.76 per share, or 30.9% from today’s (August 25) price of $ 108.30 per share.
What to do with AMD stocks
The company is also repurchasing shares as part of its new $ 4 billion share buyback program. He uses his FCF to pay for this. In the last quarter, it repurchased $ 256 million of shares. It will also help AMD’s stock to increase.
For one thing, on an annualized basis, this equates to $ 1.024 billion in buybacks. As a percentage of its market value of $ 131.4 billion, this represents about 0.77% (that is, less than 1.0%) of its market. So he clearly has more room to develop his buyback program, but it’s a good start.
I think the company’s revenue, its free cash flow generation and margins, as well as its buyouts, add up to a potentially 31% higher share price. That would put it at $ 141.76 per share, which is 31% more than today’s price.
As of the publication date, Mark R. Hake does not hold any position in any of the stocks mentioned in the article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Mark Hake writes about personal finance on mrhake.medium.com and run the Total Value of Return Guide which you can consult here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.