AMD in Three Words: Innovative, Computing, Diversified

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Background

Founded in 1969, AMD was one of the early pioneers in developing the world’s computing industry. It designed microprocessors that could perform billions of operations per second upon the 0s and 1s of binary data. These central processing units (CPUs) enabled the applications for the next five decades of computing – from workstations and desktops to laptops and Smartphones.

Over time, AMD expanded to graphics processing units as well (GPUs), which could run several processes at the same time. This parallel computing of GPUs made them ideal for rendering graphics and video images, which was perfect for the fledgling markets of gaming and video streaming.

We’re in an era of digital transformation, and AMD has refocused its business on serving a new market of more demanding customers. It now sells higher-performance chips for computationally intensive applications. One example includes Amazon Web Services and Microsoft Azure using AMD’s GPUs to achieve 40% better graphics performance for video rendering in their cloud servers. Another is the use of AMD’s EPYC CPUs to do climate research and weather forecasting 68% faster than anything that was possible before.

AMD's Data Center business segment is growing at triple-digit rate and is becoming an integral part of the investing thesis.

Thoughts on Valuation and Capital Allocation

AMD's forward guidance for Q1 was for 30% revenue growth, primarily thanks to the outperforming data center segment. Let's say that continues through the year, so that:

1) 2025 Revenue = $30 billion

Let's also say AMD captures a 52% gross margin in 2025. That would be up from 49% this past year, since it's now selling the latest-and-greatest 325x + 350x at a higher average selling price. But it also deducts $1 billion of amortization as COGS (more details on that in a minute)

2) 2025 Gross Profit = $15.6 billion

Within $AMD's operating expenses:

• R&D again grows 10% to $7.1 billion in 2025
• SG&A again grows 18% to $3.3 billion
• Amortization follows the same schedule, so $1.1 billion is recognized this year as OpEx
• No restructuring costs or licensing gains

3) 2025 Operating Profit = $4.1 billion

Final Income Statement line-item adjustments:

• AMD will again pay around ($92m) of interest expense for its long-term debt
• It will likely again recognize another $180m in other income from its short-term interest gains and FX adjustments
• It has tax shelters that keep it at only a 20% effective tax rate (same as last year)

4) 2025 Net Profit = $3.35 billion

Dividing the $3.35 billion in earnings by 1.637 billion fully-diluted shares results in:

5) 2025 Earnings Per Share of $2.05

That would be YET ANOTHER DOUBLING in year-over-year EPS. $2.05 is up 105% from $1.00 in EPS in 2024. And that was up 89% from $0.53 in 2023.

At a current stock price of $111, AMD's forward P/E of 54x still feels expensive. But that's also a bit deceptive, since the 2025 EPS are still being discounted by around $1.28 due to the continued Xilinx amortization.

So in other words, that Xilinx acquisition is still having a residual influence on AMD's financial statements and multiples. Yet the technology it acquired and also the doors it opened through hardware engineer relationships made it worth the $35 billion price tag. IMO.

It's quite difficult right now to lock down a "right price" for what AMD's shares should be worth:

• Its growth rates are accelerating and its margins are expanding thanks to the new CPUs and GPUs it's selling for AI computing in the data center
• AMD is an acquisitive company and that will cause it to heavily expense the amortization of intangibles. Xilinx was $35 billion back in 2022; but it also just acquired ZT Systems for $5 billion in 2024.
• I think a fair multiple for a company who's growing the top-line at 15% per year and EPS at 50%-100% per year is at least 30x (with earnings reflecting organic growth; i.e. after fully amortizing acquisition-related intangibles).

While this might sound crazy today, I think AMD could report $40/share of EPS by 2030. A 30x multiple on that would make for a $1,200 stock price.

That would make AMD a 10-bagger in five years.

Yes, that is aggressive. But I also think it's reasonable and achievable.

Conviction Rating Changes

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AMD's Conviction Rating was upgraded on December 11, 2024.

Recent Company Updates

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February 5, 2025

AMD's revenue grew 14%, its operating margin grew from 2% to 7%, and its earnings per share nearly doubled during the past year. Its most recent Q4 results beat expectations and it offered better-than-expected guidance for the upcoming Q1 2025.

Yet over the same timeframe, AMD's stock price has fallen 40% due to a massive contraction of its valuation multiples.

It appears the enthusiasm about how well its cutting-edge processors are improving the computing performance of data centers is being replaced by uncertainty about the impact of trade tariffs and DeepSeek.

For those who believe in its long-term future, this selloff could present a buying opportunity.

Deep Dive Presentation

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