Here Is Why We’re Increasing Our Price Estimate For AMD To $6

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Advanced Micro Devices

AMD (NYSE:AMD) has seen more than 250% increase in its stock price year to date. We recently increased our price estimate for AMD by approximately 22%, to $5.73. The revision in our price estimate for AMD is mainly because we believe that the company will manage to garner higher embedded and semi-custom revenues than what we previously anticipated for in our model. Furthermore, the company’s net cash position improved in Q3, which also added to our increased price estimate. In addition, we fine-tuned our model in other ways, lowering both the effective tax rates and capital expenditure estimate, which further contributed to an increase in our price estimate for the company. Below we detail the key reasons that led to an increase in our price estimate:

See our complete analysis for AMD here

Higher Embedded and Semi-Custom Revenues: We revised our revenue estimate for AMD’s embedded and semi-custom segment in 2017 from $2.5 billion to $2.8 billion. The company aims to significantly increase the revenue contribution from its Enterprise, Embedded and Semi-Custom products over the next few years.  These include its server and embedded processors, semi-custom System-on-Chip (SoC) products, as well as its development services and technology for game consoles. The company has scored three major design wins in its semi-custom segments, which could potentially add $1.5 billion in revenues for the company going ahead. Two of the design wins are with game console companies and the third is rumored to be with Apple for the next version of MacBook.

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Increase in Cash and decrease in debt: AMD’s cash  and cash equivalents in Q3 increased from $958 million to $1.2 billion. Also, the company’s debt declined from $2.2 billion to $1.6 billion. This is on account of the concurrent public offerings of approximately $600 million of common stock and $700 million of 2.125% convertible senior notes announced by AMD in Q3. The company retired a portion of its existing debt with the capital raised from this offering.

Lowered CapEx and Increased Depreciation: We lowered our CapEx estimate for AMD in 2016 from $102 million to $80 million. Initially, we believed that to spur higher revenue growth in the future, the company might have to maintain its CapEx as a percentage of sales higher or at least similar to its 2015 level. With this assumption and with our revenue estimates for AMD then, our estimated CapEx for AMD was coming out to be around $102 million in 2016. However, given that the company has incurred a CapEx of only $56 million in the first nine months of the year, we have lowered our 2016 capital expenditure estimate for the company to $80 million. Furthermore, we increased our estimated depreciation and amortization (D&A) forecast for AMD for the year 2016 from $102 million to $130 million, considering that the company had incurred a D&A expense of $99 million in the first nine months itself.

Reduced Effective Tax Rate: We initially believed that the tax rate for AMD is likely to increase to 18% in 2016, assuming that the company would turn profitable. However, now that the results of three out of four quarters for the calendar year 2016 are out, it seems unlikely that the effective tax rate for the company will increase. We now forecast the effective tax rate for AMD in 2016 to be approximately 10% in 2016. AMD’s tax rate for the first nine months has averaged around 9% only.

Editor’s Note: In our next analysis, we plan to write why we believe AMD is overvalued at its current price estimate. Please let us know what/why you liked or disliked in this article, and importantly alternative analyses you want to see. We encourage you to comment and ask questions on the comment section of our website, alternatively you can email at content@trefis.com /aditya.sharma@trefis.com

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