AMD’s capital resources
In the previous part of this series, we saw that Advanced Micro Devices (AMD) performed poorly compared to its rivals in terms of revenue and profits in the first nine months of 2015. This indicates that the problem is not industry-wide, but company-specific.
Subdued by strong competition and stressed capital resources, the company has undergone restructuring. Let’s look at the company’s financial position and its capability to sustain headwinds.
In an ideal scenario, a semiconductor company maintains an equity capital structure due to uncertainty surrounding its earnings. It also maintains high cash reserves to fund R&D (research and development) and M&A (mergers and acquisition) during the downturn.
AMD’s capital resources have been stressed since the company posted losses in 2012. The company has ~12 times more debt than equity. Thus, the company bears a fixed interest expense of ~$40 million every quarter, whereas earnings keep fluctuating. With low gross margins and a fixed interest expense, the company is left with little room to spend on its much-needed R&D.
On the other hand, competitors Intel, Qualcomm (QCOM), and Nvidia have a strong capital structure, giving them the flexibility to invest in R&D and undertake aggressive growth plans. Intel has a debt-to-equity ratio of 0.24, Nvidia of 0.32, and Qualcomm of 0.35.
Moreover, AMD had a negative FCF (free cash flow) of $84 million as of September 27, 2015. On the other hand, Nvidia has an FCF of $238 million, Intel has an FCF of $4.5 billion, and Qualcomm has an FCF of $1.5 billion during the same period. The joint venture with Nantong Fujitsu Microelectronics should bring in ~$317 million cash for AMD, giving it some room to spend on R&D.
The cash-strapped semiconductor company needs a breakthrough product to boost its revenues. With Zen, it has another chance to climb the growth trajectory. If several factors fall into place, it would positively impact AMD’s stock. We will discuss these factors in the next part of this series.
You can gain exposure in the semiconductor industry through the Semiconductor ETF (SMH), which has exposure in 26 stocks. It has a 19.31% exposure in INTC and 2.82% in NVDA.