AMD Stock Is Set to Rise as Strong Demand Drives High Free Cash Flow

Advanced Micro Devices (NASDAQ:AMD) released stellar earnings on Feb. 1 for the quarter and year ended Dec. 31, 2021. As a result, AMD stock is higher and likely to move up significantly over the next several months.

One reason is that analysts are raising their price targets because of higher-than-expected earnings. For example, Seeking Alpha shows the average price target has moved up 6.4% from $141 to $150 in the last month.

On Feb. 9, AMD stock closed at $132.85. This is up 29% from its trough price of $102.60 reached on Jan. 27. In other words, with the higher earnings results on Feb. 1 and the upward adjusted analyst targets, AMC stock is moving significantly higher.

Where Things Stand With AMD

On Feb. 1, AMD reported its Q4 revenue rose 49% year-over-year (YOY) and its net income was up 76% on a non-GAAP basis YOY. Moreover, earnings per share (EPS) were up 77% YOY.

Even on a quarter-over-quarter (QOQ) basis, its financial results were impressive. For example, Q4 EPS was up 26% on a QOQ basis.

CEO Dr. Lisa Su said that its data center revenue had doubled YOY from the growing adoption of AMD Epyc processors by cloud and enterprise customers. With the launch of the company’s next generation of PC, gaming and data center products, she expects revenue to continue to be very strong.

This translates into higher free cash flow (FCF) at the parent company. AMD is one of the few companies that report exact quarterly FCF. In Q4, its FCF was $736 million, up 53% YOY from last year’s $480 million and slightly below last quarter’s $764 million.

The main point is AMD is extremely profitable now, especially from a cash flow standpoint. That is going to do good things for AMD stock in the long run.

Moreover, the company said in its outlook for Q1 2022 it expects 45% higher revenue at $5 billion, plus or minus $100 million. At the same FCF margin rate (15.3%) as in Q4, we can expect FCF of $765 million. We can use that to value AMD stock.

What AMD Stock Could Be Worth

For example, applying 15.3% against analysts’ projections for 2022 revenue of $21.5 billion results in a FCF estimate of $3.29 billion. Using a 1.5% FCF yield metric results in a price target of $219.1 billion.

In other words, using the $159.3 billion market cap from Yahoo! Finance, AMD’s target market value of $219.1 billion is 37.5% higher than today’s value. This implies AMD stock is worth 37.5% more than its Feb. 9 price of $132.85. That results in a price target of $182.67 per share.

Analysts have slightly lower price targets, as I mentioned earlier. The average price target of 39 analysts at Seeking Alpha is $150. In addition, the average target of 23 analysts surveyed by TipRanks is $156.95, or 18% higher than its Feb. 9 price.

Barron’s magazine reported on Feb. 9 that Louis Miscioscia of Daiwa Capital Markets raised his recommendation on AMD to a “buy.” He also raised his target price to $150 per share, up from $140. He points out that the Q4 results were at the high end of expectations and AMD is delivering on its multi-year growth strategy.

I expect other analysts will upgrade their forecasts and models for the company going forward. It also doesn’t hurt that there is a severe semiconductor chip shortage, so the prices of its products will continue to be high. In addition, the analyst points out demand for AMD’s products should stay strong across all product lines, including PCs, gaming, graphics processing units (GPUs) and data centers.

As a result, expect to see AMD stock drift up as more and more analysts raise their price targets on the company in the next month.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com runs the Total Yield Value Guide which you can review here.

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