AMD (AMD) - Get Report is not the growth story so many investors believe it is. With several high-level executives fleeing AMD, should investors take note? I contend that AMD makes for a very risky and overvalued investment -- buyer beware -- for these three reasons.
1. Weak Growth
AMD pushes the narrative that it's a high growth company. However, this doesn't line up with the facts.
Once the crypto bubble burst, we can see that AMD's revenue growth rate has continued to slow since Q2 2018. In fact, while AMD finished Q4 2018 with 6% year-over-year growth, its Q1 2019 guidance has AMD pointing towards its top line being down 24% year-over-year. Consequently, it's hard to see to see how this level of revenue declines aligns with the financials investors should expect from a high-growth company.
Looking out further, for full-year 2019, AMD guides investors that they should expect to see high single-digit top-line growth. Even if this translates into 9% year-over-year revenue growth, that would mean that AMD's Q4 2019 revenue should be up at least 15% compared with the same period this year, which given the strength of Q4 2018, would be a very tough challenge.
2. Free Cash Flow Is Worse Than Last Year
Whereas 2017 was going to be the year for products, 2018 was meant to be the year for strong revenue growth. Furthermore, this strong revenue growth was supposed to have converted into strong free cash flow. However, that did not turn out to be the case. AMD's free cash flow for 2018 was negative $129 million. And looking back to 2017, AMD's free cash flow was negative $45 million, which appears to have been fairly strong in comparison with 2018. Looking back further to 2016, AMD was actually free cash flow positive at $13 million.
At what point will AMD be free cash flow positive? Presently, it is difficult to say with certainty. However, one thing we can be sure about, CEO Lisa Su's compensation for 2017 was $11 million, which was substantially more than all shareholders combined made.
3. Long-Term Financial Model Is Questionable
In May 2017, AMD held an Investor Presentation day where it highlighted that over the next three years, or by year-end 2020, AMD would be on the path towards $0.75 of EPS. AMD is now approximately 22 months into this roadmap. And looking over its trailing twelve months, AMD's EPS finished 2018 at $0.46, with non-GAAP gross margins of 39%.
For 2019, AMD's revenue in the best case is likely to reach 9% growth, as noted. At the same time, its non-GAAP gross margin is guided for 200-300 basis points expansion, or approximately 41%-42%. Altogether this points to AMD approximately reaching $0.53 of EPS in 2019, and in the ballpark of $0.60-$0.65 in 2020, which would imply that AMD would meaningfully miss out on its long-term financial model.
Additionally, it should be noted that my long-term estimates assume no further shareholder dilutions from AMD. However, given that AMD has a long track record of needing to raise capital by diluting its shareholders, with its total number of shares outstanding increasing by 55% during the past decade, AMD will now have to contend with generating enough cash from operations to meet its obligations. Consequently, this is one less avenue AMD has at its disposal if it is indeed to reach its target of $0.75 in EPS.
Valuation - No Margin Of Safety
The above reasons, together with AMD's valuation, demonstrates that AMD carries no margin of safety. Investors clamoring for growth will not be satisfied to pay X times its revenue, particularly when they see that AMD is not growing anywhere near the pace needed to support its hot valuation.
AMD was the second best performing stock in the S&P500 in 2018. Investors chasing last year's winners are likely to overpay for this participation, however. Moreover, history teaches us that, last year's winners are often this year's losers.
The author holds no positions in any stocks mentioned in this article.