2 Reasons to Like AMD (and 1 Not So Much)

Over the past six months, AMD’s shares (currently trading at $117.27) have posted a disappointing 18.6% loss while the S&P 500 was down 1.9%. This might have investors contemplating their next move.

Following the pullback, is now a good time to buy AMD? Find out in our full research report, it’s free.

Why Does AMD Spark Debate?

Founded in 1969 by a group of former Fairchild semiconductor executives led by Jerry Sanders, Advanced Micro Devices (NASDAQ:AMD) is one of the leading designers of computer processors and graphics chips used in PCs and data centers.

Two Positive Attributes:

1. Skyrocketing Revenue Shows Strong Momentum

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, AMD grew its sales at an incredible 30.8% compounded annual growth rate. Its growth beat the average semiconductor company and shows its offerings resonate with customers. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. Outstanding Long-Term EPS Growth

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

AMD’s EPS grew at a spectacular 36.9% compounded annual growth rate over the last five years, higher than its 30.8% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

One Reason to be Careful:

Weak Operating Margin Could Cause Trouble

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

AMD was profitable over the last two years but held back by its large cost base. Its average operating margin of 6.4% was weak for a semiconductor business. This result is surprising given its high gross margin as a starting point.

Final Judgment

AMD has huge potential even though it has some open questions. After the recent drawdown, the stock trades at 25.6× forward P/E (or $117.27 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.

Stocks We Like Even More Than AMD

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