Technology Advanced Micro Devices, Inc. (AMD): Execution Continues but Shares Continue to Appear Appropriately Valued

Advanced Micro Devices, Inc. (AMD): Execution Continues but Shares Continue to Appear Appropriately Valued

Published By News Desk at July 27, 2017 11:55 am MKM Partners still sees shares as full valued at current levels given medium-term sales and earnings growth prospects

Advanced Micro Devices, Inc. (NASDAQ:AMD) 2Q results beat consensus expectations and MKM Partners estimates with revenue increasing 19% year-over year on continued growth in the Computing and Graphics segment, which increased 51% relative to Q2 2016. Enterprise, Embedded and Semi-Custom sales decreased 5% year-over-year but increased 44% sequentially. AMD returned to non-GAAP net income profitability in the quarter and achieved operating profitability in the Computing and Graphics segment for the first time in three years. While MKM Partners continues to appreciate AMD’s execution, MKM Partners still sees shares as appropriately valued at current levels.

AMD reported Q2 revenue of $1,222 million and non-GAAP EPS of $0.02, which were above consensus expectations and MKM Partners estimates. Non-GAAP gross margin of 33.1% was roughly in line with management guidance and increased 200 basis points year-overyear. Non-GAAP operating expenses were $381 million, up 5% sequentially as AMD continues to invest in growth opportunities. The Computing and Graphics segment increased 51% year-overyear and 11% sequentially as AMD recorded its first full quarter of Ryzen sales.

Looking ahead to the September quarter, AMD expects revenue to increase approximately 23% sequentially at the midpoint of its guidance range, or roughly $1,500 million, which is above the current consensus estimate of $1,393 million and implies a 15% year-over-year increase in sales. With modest gross margin improvement expected and another uptick in opex, our non-GAAP EPS forecast for 3Q remains unchanged at $0.07. For the full year, AMD now expects revenue to increase in the midto-high teens percentage, year-over-year, versus prior guidance for revenue growth in the low double digit range versus 2016.

While MKM Partners continues to appreciate AMD’s execution, MKM Partners still sees shares as full valued at current levels given medium-term sales and earnings growth prospects. AMD shares peaked at 3.0x EV forward sales at the height of its server market share in 2006 and have averaged roughly 2.0x EV to forward sales in growth periods over the past 20 years. MKM Partners maintain fair value estimate of $13, which is based on the midpoint of these two levels, or roughly 2.5x enterprise value on 2018 revenue estimate.