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What Price Ratios Say about AMD’s Valuation

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Forward PS ratio

Advanced Micro Devices (AMD) stock has consolidated after a year-long rally. Currently, it’s trading at $11.38. Even at this price, the stock is valued better compared to its fundamentals.

The forward PS (price-to-sales) ratio tells us the amount investors are willing to pay for every dollar of the company’s estimated sales for the next four quarters. AMD trades at 2.1x its fiscal 2018 sales estimate. Intel (INTC) trades at 3.37x its sales estimate, NVIDIA (NVDA) trades at 13.8x its sales estimate, and Broadcom (AVGO) trades at 6.4x its sales estimate.

AMD’s sales growth is closer to NVIDIA and way ahead of Intel. AMD’s fiscal 3Q17 sales rose 26% YoY (year-over-year) closer to NVIDIA’s sales growth of 32% YoY and way above Intel’s sales growth of 2% YoY. From a sales perspective, AMD is the cheapest of the four stocks at $11.38.

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Forward PE ratio

The forward PE (price-to-earnings) ratio tells us the amount investors are willing to pay per dollar of estimated EPS (earnings per share) for the next four quarters. AMD trades at 32.3x its fiscal 2018 EPS estimate. Intel trades at 13.8x its EPS estimate, NVIDIA trades at 45.7x its EPS estimate, and Broadcom trades at 15.4x its EPS estimate.

All three companies are more profitable than AMD. However, AMD is improving its profits. In fiscal 3Q17, AMD’s EPS rose 233% YoY—way above Intel, NVIDIA, and Broadcom’s EPS growth of 26%, 41%, and 42%, respectively. AMD is expected to report stronger EPS growth in the coming quarters as it starts from near zero profit.

From the earnings perspective, AMD and NVIDIA are the most expensive of the four stocks listed above. AMD’s investors react aggressively to any decline in profit because they’re paying a lot to get that profit.

Price-to-FCF 

A company’s price-to-FCF (free cash flow) ratio tells us the amount investors are willing to pay for every dollar of FCF. FCF is important because it’s the amount that’s left for shareholders after setting aside capital expenditure. Companies pay a dividend and buy back shares using FCF.

On November 24, 2017, AMD had a negative price-to-FCF of 50.5x. Its low profits and high-interest burden put pressure on its cash flow. The company has been increasing its income and shrinking its debt to strengthen its balance sheet. However, it still has a long way to go before it’s FCF positive. AMD investors aren’t very interested in FCF because they purchased the share for capital gains and not dividend.

At $11.38, AMD stock is fundamentally expensive compared to its earnings and FCF. However, the stock is cheap compared to its sales.

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