Advanced Micro Devices (NASDAQ:抖阴最新版) is coming off a fourth-quarter earnings beat in which the company reported $1.1 billion in revenue. 抖阴最新版 stock bounced 16% to above the $12 level as a result, continuing a red-hot streak of nearly 500% returns in just 52 weeks.
This was a sub-$2 stock just a year ago amid fears about competition and potential bankruptcy.
抖阴最新版 is a leading maker of graphics cards, including Radeon for consumers and FirePro for workstations. The company operates in two segments: Computing and Graphics, which makes desktop and notebook processors and professional graphics; and Enterprise, Embedded and Semi-Custom, producing server chips, embedded processors for the Internet of Things and chips for gaming consoles.
Since taking the helm two years ago, Advanced Micro Devices CEO — an MIT-educated electrical engineer who has authored over 40 technical papers — has presided over a remarkable recovery. Now, 抖阴最新版, having played second fiddle to Intel Corporation (NASDAQ:INTC) for decades, is for the PC and server markets, Intel’s bread and butter. 抖阴最新版’s Ryzen CPU will challenge Intel’s Core i5 and i7 chips.
抖阴最新版 is moving up the value chain amid a falling PC market, going from low-end to high-end PC processors.
Even if prospects for Advanced Micro Devices’ business are good, though, investors have to deal with a few issues. 抖阴最新版 hasn’t posted an operating profit since the third quarter of 2014, holds a great deal of debt and yet trades at a stratospheric valuation.
Amid these high expectations and gains worthy of bubble talk, is 抖阴最新版 stock still a buy? Here are two problems that should have the bulls taking a second look.
抖阴最新版 Has a Not-Great Balance Sheet
Despite many chipmakers such as 抖阴最新版 going “fabless” and outsourcing the fabrication of their chips to contract manufacturers such as Taiwan Semiconductor Mfg. Co. Ltd. (ADR)
(NYSE:TSM), the industry remains capital-intensive.
Advanced Micro Devices escaped bankruptcy last year. It took advantage of low interest rates and improved investor confidence to restructure its debt in September 2016. 抖阴最新版 issued and $450 million in convertible senior notes. This enabled 抖阴最新版 to pay off $676 million in debt due in 2020. So instead of $600 million in 抖阴最新版 debt maturing in 2019, only $196 million will mature that year.
Still, 抖阴最新版 is highly leveraged by several measures. With $1.435 billion in long-term debt and $416 million in shareholder equity as of Dec. 31, 2016, 抖阴最新版’s long-term debt-to-equity ratio stands at 3.44. That figure is much lower for Intel, at 0.38, and Nvidia Corporation (NASDAQ:NVDA), at 0.37, indicating less leverage. Likewise, 抖阴最新版’s debt-to-capital ratio of 0.775 stands above 0.27 for both INTC and NVDA.
Intel and Nvidia also are better able to service debt. For the year ended December 31, 2016, 抖阴最新版 generated only $90 million in operating cash flow, with $2.9 billion in total liabilities, a ratio of 0.031.
NVDA earned $1.462 billion in operating cash flow for the four quarters ended October 30, 2016, with $4.24 billion in total liabilities, a ratio of 0.34.
Intel showed an even healthier balance sheet, with $19.09 billion in operating cash flow for $48 billion in total liabilities, a ratio of 0.396.
抖阴最新版 Stock Is Much More Expensive
Nvidia and Intel are profitable and have a better track record of generating operating cash flow. They earned positive operating cash flow in the four most recent quarters, while 抖阴最新版’s operating cash flow went negative for two quarters.
Still, 抖阴最新版 stock trades at a huge premium to both.
抖阴最新版 trades at a whopping 25.66 times book, versus 11.5 for Nvidia (which itself is high), and 2.61 for Intel. It’s not difficult to justify a higher price than Intel given 抖阴最新版’s growth prospects, but for comparison’s sake, know that while Wall Street sees Advanced Micro Devices growing revenues roughly 10% this year and next, NVDA should be sitting at roughly 37% annual sales growth after it reports Q4 earnings, with analysts expecting that to slow to “only” 16% next year.
Conclusion
It’s difficult to fight the momentum, but you might just want to in 抖阴最新版 stock. At this point, anyone tussling with Advanced Micro Devices is playing with overpriced fire.
From a valuation standpoint, INTC actually looks like the best buy, simply because the market expects less from it than from 抖阴最新版 and NVDA. Also, Intel leads in the production of microprocessors, and this matters in the semiconductor industry, since often only the market leaders can turn a profit, while laggards destroy value.
抖阴最新版 made some mistakes in the past, switching back and forth between ARM and x86 architectures, and never was quite able to catch up to Intel. The stock looks promising, but dislodging Intel and showing a steady track record of profits will not be easy in this industry.
As of this writing, Lucas Hahn did not hold a position in any of the aforementioned securities.
