We discussed in our previous article that Advanced Micro Devices, Inc. (NASDAQ:AMD) stock looked like an excellent and undervalued proposition as it fell below $100. After parsing AMD’s FQ1’22 earnings report, we are even more confident that AMD stock remains significantly undervalued. The market’s fear over semi stocks continues to run very deep, as investors are concerned over much weaker end demand for PC impacting AMD.
Let’s be clear here. There should be little doubt that the PC market has remained weak in April, and headwinds could have even worsened through May. Our supply chain checks on Taiwan notebook ODMs and their key supply chain partners corroborate our view.
But, investors must ask themselves several critical questions. Do they believe in CEO Dr. Lisa Su and her team’s commentary that it had already baked in the headwinds in their FY22 guidance? Do they believe Dr. Su when she said AMD would continue to take share against Intel (INTC) in the consumer and server segments? Most importantly, do investors believe that AMD can execute to meet or even surpass its 60% revenue growth guidance in FY22?
If they do, we have good news. Because AMD stock has gotten even cheaper, falling to below $90 at writing. Notably, AMD stock also outperformed (-8.65%) the SDPR S&P 500 ETF’s (SPY) -10.56% return since our previous article was published.
Hence, AMD investors are given another fantastic opportunity to add exposure to a significantly undervalued, profitable, high-quality semiconductor leader.
As such, we reiterate our Strong Buy rating on AMD stock.
The Paper Hands Bailed Out Of AMD Stock
As a result of the sharp sell-off, AMD stock last traded at an NTM normalized P/E of 20x. Therefore, AMD stock no longer trades significantly above the semi-industry median P/E of 19.5x. Also, AMD’s NTM PEG ratio has dropped to 0.68x, against the industry’s median of 1.48x. As a result, the bifurcation in AMD’s PEG ratio against the industry’s median is highly perplexing. Bearish semi investors seemed to have entirely written off the credibility of AMD’s growth estimates and management’s ability to execute against its guidance.
AMD’s Robust EPS Growth Will Sustain Its Valuations
AMD guided for FY22 revenue of $26.3B, up 60% YoY in its FQ1 earnings call. However, it also included Xilinx’s contribution. Excluding Xilinx, AMD would still have raised its organic revenue growth to mid-30%, above its previous guidance of 31%. AMD also expects its growth to be broad-based, despite baking in more conservative guidance for its PC segment. Notably, AMD estimated a high single-digit decline in its PC segment compared to Intel’s more optimistic guidance. Dr. Su emphasized (edited):
We have taken a bit more of a conservative perspective on the PC market. Again, I think the softness is in certain parts of the market. It’s not in all parts of the market. And our focus is on where we add the most value in the market and that is in the premium segments. And so even under the backdrop of, let’s call it, a softer PC market, we can continue to expect to gain revenue share in the process. And that’s sort of our overall strategy. (AMD’s FQ1’22 earnings call)
But, we are aware that the market is forward-looking. Therefore, it’s unlikely that AMD can continue to sustain that mid-30s growth cadence moving forward, even with Xilinx’s acquisition. Consequently, we believe that the consensus estimates have reflected the appropriate slowdown in FY23’s revenue growth momentum.
However, we believe it’s critical to note that AMD can continue its robust EPS growth, even as its revenue growth cadence slows from FY23. For instance, AMD’s FY23 EPS is expected to increase by 25.2% even as topline growth is estimated to slow to 13.3% YoY. Of course, AMD’s ability to sustain its operating margins will be critical to help fuel its bottom-line expansion. But, given management’s expectations to gain share in the premium PC segment and the servers segment, we believe the estimates are credible.
Is AMD Stock A Buy, Sell, Or Hold?
AMD stock has been digesting its massive move upwards on its way to the significant bull trap in November. However, we also observed a move by the market makers to force capitulation in AMD stock over the past six to eight weeks.
As a result, a significant level of froth has been removed from AMD stock, as it sits about 45% below its November highs. Furthermore, we believe the potential capitulation in tech stocks could also help AMD stock recover its upward momentum. As explained earlier, we believe AMD stock has already started to form its bottoming process, as it outperformed the SPY since our previous article.
As such, we reiterate our Strong Buy rating on AMD stock. In addition, we maintain our conviction that AMD stock is significantly undervalued below $100.