Corporate Valuations

Advanced Micro Devices, Inc. (AMD)

Final Valuation Project

Tamilla Zohdi

000092728

FNN 6205 Quantitative Models in Finance

Ivan K. Cohen

Spring 2021

Executive Summary

The report aims to determine whether Diversity should do a takeover bid on the ‘bulls’ eye’ company which in this case is Advanced Micro Devices, Inc. (AMD), an American multinational semiconductor company.

The past 5 years of historical data are provided, and then the next 5 years are forecasted. The discounted cash flow valuation is carried out using weighted average cost of capital and the free cash flow. Coverage of Advanced Micro Devices is resumed with an investment rating of BUY and a target price of $88.31.

The assumptions made for forecasting and calculations will be explained and some analysis on how AMD’s share price performs against its competitors will be included.

The report also looks at the EBITDA multiple valuation method for the company. There is some sensitivity analysis conducted to determine the effect that both valuation methods as well as revenue are likely to affect the value of the company.

The report comes to the conclusion that Diversity should do a take-over bid for the company.

Recommendation

Coverage of Advanced Micro Devices is resumed with an investment rating of BUY and a target price of $88.31. Diversity should consider doing a take-over bid for the company.

About the Company

Advanced Micro Devices is an American multinational semiconductor company. The chief executive officer is Lisa Su, who is also president. The company offers the world’s most powerful processors, and power devices of all shapes and sizes, from supercomputers to game consoles, from always-on cloud infrastructures to children’s laptops. The company aims to deliver “high performance, low consumption” where achieving sustainable progress in technology is not only imperative, but a responsibility that they “whole-heartedly embrace to protect our precious planet” (AMD, 2021). The company has the objectives to turn more possibilities into new opportunities and innovate through collaborations.

The company is traded as Advanced Micro Devices, Inc. on the Nasdaq stock exchange and is a constituent of the Nasdaq 100 index. On September 27, 1972, AMD issued 620,000 shares of common stock (500,000 by the company and 120,000 by selling shareholders), over the counter, at $15.50 per share, raising a total of $7.5 million it its first public offering (AMD, 2021). Today (13/04/21) the company is traded at $80.05 and has a market cap of 97.26B (Yahoo Finance, 2021)

Share Price Performance

Yahoo Finance, AMD and Intel share price performance July 2019 – April 2021

The share price comparison above indicates that Intel was performing better than AMD until July 2020 when AMD’s stock rocketed by 12% after the chipmaker beat second-quarter sales and earnings targets. They have been performing better than Intel ever since and are one of the reasons intel has performed poorly.

Yahoo Finance, AMD and Intel performance vs Nasdaq 100 index April 2020 – April 2021

This chart gives a clear graphical representation of the relative performance of company share prices and the Nasdaq 100 Index. The competition from AMD is affecting Intel’s price and both companies have price performances that move in opposite directions, reflected in the above chart. The 1-year performance of AMD has risen by 97.29% which is 3 times the performance of Intel. Overall, AMD has shown to be volatile but overperforms compared to the index and its major competitor.

Financial Performance

AMD has shown strong financial performance since 2018 in terms of profitability. The return on equity has gone from a negative return of 119.7% to a positive 42.7% return in 2020. Looking forward at the statements, the return on equity is expected to be between 25% and 17% (represented below).

The current ratio suggests that AMD is highly capable of covering its obligations. AMD has a larger proportion of current asset value relative to the value of its current liabilities. Looking forward AMD will have a current ratio suggesting that 11.5 times their current liabilities can be covered by current assets. The quick ratio is a more conservative measure than the current ratio. Although inventory is removed from the calculations, AMD shows strong ability to cover current liabilities by current assets by up to 10 times in 2025.

In terms of liquidity back in 2016 AMD had a negative Times Interest Earned (TIE) ratio which suggests that they didn’t have enough cash after paying debts to continue to invest in the business. However, ever since then the company has shown a ratio increasing every year to reach 29.13 in 2020. Allowing AMD to cover 29 times their interest obligations. The company’s high forecasted TIE ratios make sense given that earnings before tax is increasing but long-term debt is held constant.

The forecast suggests that going forward it will be even easier for the company to pay down any debt. The debt-to-equity ratio enforces the idea of debt being paid of easily given that equity increases whilst debt is decreasing. There is extremely low risk for bankruptcy or default and, therefore, AMD is financially stable.

Forecasted Financial Statements

Sales Growth

The company has struggled for decades to make sustainable gains against Intel, the world’s largest chipmaker. However, the smaller company has revamped its products and outsourced production, helping it create processors that match or exceed the performance of Intel’s offerings. In 2020, despite the COVID-19 pandemic, AMD’s revenue was up 45% and in Q4 2020 sales increased by 53% compared to Q4 2019. AMD is expected to withstand the pandemic because it serves two areas in demand for millions of people being confined in their homes — work and play. Sales are increasing rapidly for the company and are forecasted by CEO, Lisa Su, to grow by 37% in 2021. For the years 2022 to 2025, a linear regression is used to forecast the growth of revenue. This is done using the trend of the 5 previous years of GDP with revenue, then, deriving the growth rate from the forecasted GDP. The trend and forecasted revenue are illustrated below.

Income Statement

The items in the income statements have been projected using the following:

· Cost of sales are projected using the linear regression. The relationship between sales and cost of good gives the equation: COGS = 0.3965 x Sales +1437.5

From 2021 to 2025 cost of sales if between 46 and 50% of sales.

· The United States imposes a tax on the profits of US resident corporations at a rate of 21 percent.

· The interest rate has been calculated using the average interest divided by the average long-term and short-term debt from the 5 previous years.

Balance Sheet

The items in the balance sheet have been projected using the following:

· Cash and cash equivalents are used as the balancing item.

· Inventory forecasted using the regression model. This item is projected using sales where Inventory = 0.1277 x sales + 112.1

· Accounts receivable, forecasted using the regression model. This item is projected using sales where AR = 0.3433 x sales + 1041

· Accounts payable, forecasted using the regression model. Again, this item is projected using sales, where AP = -0.0465 x sales + 1183.9

It is important to note that the relationship between the two shows a lot of unexplained variation, suggested by the R square 0.15.

· Other items such as property plant and equipment, goodwill, long-term investments, accrued liabilities and long-term debt are held constant.

Discounted Cash Flow Method (DCF)

The discounted cash flow valuation method relies on a projection of the business’s future revenues, profit, and cash flow. It uses Weighted Average Cost of Capital (WACC) and the Free Cash Flow (FCF).

The WACC is derived by taking AMD’s weighted average of cost of debt and cost of equity.

The cost of debt was obtained as the company’s 2020 interest payment divided by its debt. The cost of equity is calculated using the Capital Asset Pricing Model (CAPM) from a beta determined as 2.06 by yahoo finance. The risk-free rate is provided as the 10-year US rate of 1.67% and the market risk premium is 5.2% according to Statista.

The WACC calculated at 8.54% and since 95% of the company is operating with equity, most of the WACC is based on the cost of equity, 8.94%. To discount the future cash flows to present value, WACC is inserted into the NPV formula in excel with the FCF values. The terminal growth rate is estimated at 6% which represents an average of the growth rate from 2021 to 2025.

The FCF measures the performance of AMD as it represents the amount that the company is able to generate after setting aside cash for capital expenditures and for the change in operating working capital. The formula for calculating the FCF is:

FCF = EBIT (1-Tax Rate) + Depreciation – Change in Operating Work Capital – Change in PP&E

Illustrated above is the DCF valuation of AMD. It suggests a book value of $88.31, higher than what the company is presently trading at. The market share price is $80.05 (closing price on 12/4/2020), indicating that the share price is trading at 9.3% below fair value. Therefore, Diversity should do a takeover bid for AMD.

EBITDA Multiple Method

Another valuation method is the EBITDA multiple method. Rather than using cash flows directly,

It is a financial ratio that compares a company’s value to its annual EBITDA (Earnings Before Tax, Interest, Depreciation and Amortization).

The model uses a five-year weighted average approach. It gives each year a relative weight, 1 for 2021, 2 for 2022, 3 for 2023, 4 for 2024 and 5 for 2025. By multiplying each EBITDA amounts by its respective weight and then dividing the total by 15 which is the sum of the waiting line, the multiple (M) is derived. The multiple for AMD is 22.

The valuation formula is expressed as follows:

Value of firm = M x EBITDA

The seller of a business will naturally seek the formula that yields the highest price, while the buyer will push in the opposite direction. The seller of a high-growth business, for instance, might argue that the parties should look only at the most recent year’s EBITDA rather than EBITDA over the five-year period (Knight, 2016).

In this case the AMD would avoid the most recent year’s because a using a two-year weighted average for instance would benefit Diversity. Using the same multiple, the company would be valued at $75,878 compared to $97,266. Therefore, if Diversity where to negotiate a value in would be ideal to consider going as low as $75,878.

The seller might also push for a higher multiple. A multiple of 24 would increase the business’s value to $106,209.

Sensitivity Analysis

A sensitivity analysis is conducted on the weighted average cost of capital to analyse the effect a larger or smaller percentage has on the book value of AMD.

In this analysis two different values are given for the WACC. The first is a slight decrease of 0.04% in the WACC, resulting in an increase in the book value illustrated below. The smaller the WACC is, the larger the share price will be, suggesting a buy.

The second analysis with an increase in WACC by 3% shows the opposite where the larger WACC is, the smaller the share price, suggesting a sell. Also, the lowest WACC which derives a book value that suggests that AMD is undervalued is at 8.8% where anything above would cause the company to be overvalued.

A sensitivity analysis is also done on the company’s revenue and the effect this has on the valuation. If sales were in reality lower than predicated and the CEO has been overly confident, this will affect the cash flows and in turn effect the discounted cash flow valuation but also the earnings before tax and therefore the EBITDA valuation.

A decrease of 1% in the original revenue growth forecast has an effect on other variables that are a percentage of sales. More importantly, a valuation under this assumption gives a book value per share of $79.42. This means that AMD would be overvalued by 0.8% but this would not necessarily change the recommendation from a buy to a sell. AMD would still be a good prospect for a takeover bid.

Conclusion

Advanced Micro devices is a good opportunity for Diversity to invest cash and create shareholder value. The DCF valuation method concludes that the company is a buy with an undervaluation by 9.3%. The sensitivity analysis shows that even with a 1% decrease in growth AMD is still a good prospect for Diversity with just a slight overvaluation by 0.8%.

The position to buy is further confirmed by an increase in the stock price since the valuation has been done. From April 13th, 2021 to April 19th, 2021, AMD’s share price increased from $80.05 to $81.11.

The company has shown steady growth over the past 5 years and is likely to continue to perform as such according to the forecast analysis. With future growth potential and continuous research to improve, Diversity may have found just what it was looking for. The company is expected to make a return on equity of 17-20% which is attractive to investors such as Diversity.

AMD is a good prospect for a takeover bid. Diversity should purchase the company for $80.05.

Appendix

Bibliography

Advanced Micro Devices, Inc. 2021. FAQ. [online] Available at: <https://ir.amd.com/contacts/faq>.

Finance.yahoo.com. 2021. Yahoo is now a part of Verizon Media. [online] Available at: <https://finance.yahoo.com/quote/AMD/>.

Knight, J., 2016. Business Valuation. Harvard Business School Publishing.

Leswing, K., 2021. AMD beats, driven by game console and PC sales. [online] CNBC. Available at: <https://www.cnbc.com/2021/01/26/amd-amd-earnings-q4-2020.html>.

Statista. 2021. United States - Gross domestic product (GDP) 2025 | Statista. [online] Available at: <https://www.statista.com/statistics/263591/gross-domestic-product-gdp-of-the-united-states/>.

Tax Policy Centre. 2021. How does the corporate income tax work? [online] Available at: <https://www.taxpolicycenter.org/briefing-book/how-does-corporate-income-tax-work>.

Revenue

Net revenue

18565000 19520000 20580000 21430000 20930000 21921000 4319 5253 6475 6731 9763 13375.310000000001

20212022202320242025Perpetuity

2,900.822,743.573,162.733,508.793,718.23155,058.46

WACC 8.54%

Growth rate 6% Net Present Value 107,293.28

Weight of equity 89% Total shares outstanding1,215

Weight of Debt11% Book Value per Share88.31$

Equity 5837

Debt 708 Market Value97,266.00

Total value 6545 Value per share 80.05$

Cost of equity8.94%

Cost of Debt6.6%

Maret risk premium 5.2%

Risk free rate 1.67%

Beta 2.06

Tax 21%

Year

FCF

Periods 12345

EBITDA 3,091 3,628 4,238 4,657 4,939

Weighted EBITDA 66,381

Weighted Average EBITDA4,425

Multiple 22

Value in millions 97,266

Shares outstanding 1,215

Price per share 80

Market Value 97,266

Total Shares Outstanding1,215

Market Value 80 Sum periods15

Multiple Valuation

20212022202320242025Perpetuity

2,900.822,743.573,162.733,508.793,718.23157,652.98

WACC 8.5%

Growth rate 6% Net Present Value 109,117.50

Total shares outstanding1,215

Book Value per Share89.81$

Market Value97,266.00

Value per share 80.05$

Year

FCF

Sensitivity Analysis Increase in WACC

20212022202320242025Perpetuity

2,900.822,743.573,162.733,508.793,718.23140,761.59

WACC 8.8%

Growth rate 6% Net Present Value 97,244.05

Total shares outstanding1,215

Book Value per Share80.04$

Market Value97,266.00

Value per share 80.05$

Year

FCF

Sensitivity Analysis Decrease in WACC

Year 20212022202320242025Perpetuity

FCF 2,874.632,650.322,973.373,217.443,323.10138,580.55

WACC 8.54%

Growth rate 6% Net Present Value 96,493.03

Weight of equity 89% Total shares outstanding1,215

Weight of debt 11% Book Value per Share79.42

Equity 5837

Debt 708 Market Value97,266.00

Total value 6545 Value per share 80.05

Cost of equity 8.94%

Cost of Debt 6.6%

Maret risk premium 5.2%

Risk free rate 1.67%

Beta 2.06

Tax 21%

ADVANCED MICRO DEVICES, INC.

20212022202320242025

Growth rate 37%15%15%13%12%

50%49%48%47%46%Of sales

Operating expense 19%19%19%19%19%

Interest 9%9%9%9%9%

Average Corporate Income tax21%21%21%21%21%

Inventory 14%13%13%13%13%Of sales

Receivables 11%10%9%9%8%Of sales

Payables 4%3%2%1%1%Of sales

2016201720182019202020212022202320242025

Net revenue 4,319 5,253 6,475 6,731 9,763 13,375 15,408 17,750 20,028 22,380

Cost of sales 3,316 3,466 4,028 3,863 5,416 6,741 7,547 8,476 9,379 10,311

Gross Income 1,003 1,787 2,447 2,868 4,347 6,634 7,861 9,275 10,649 12,069

Operating expense 1,386 1,660 1,996 2,237 2,978 3,544 4,217 5,018 5,972 7,107

EBIT (383) 127 451 631 1,369 3,091 3,644 4,256 4,677 4,962

Interest expense (156)(126)(121)(94) (47) (30) (30) (30) (30) (30)

Other expense, net 80 (9) - (165) (47) - - - - -

Profit before tax (459) (8) 330 372 1,275 3,061 3,615 4,227 4,648 4,933

Income tax expense 3925(7)31 (1,215) 643 759 888 976 1,036

Net Income

(498) (33) 337 341 2,490 2,418 2,856 3,339 3,672 3,897

(Millions $) (Unaudited)

2016201720182019202020212022202320242025

Assets

Current assets:

Cash and cash equivalents 1,264 1,185 1,078 1,466 1,595 6,124 8,555 11,406 14,603 18,009

Short term investments 78 37 695 - - - - -

Accounts receivable 343 433 1,235 1,879 2,076 1,500 1,570 1,650 1,729 1,809

Inventories 751 739 845 982 1,399 1,820 2,080 2,379 2,670 2,970

Other current assets 172 265 304 233 378 378 378 378 378 378

Total current assets 2,530 2,622 3,540 4,597 6,143 9,822 12,583 15,813 19,379 23,166

Property and equipment, net 164 261 348 500 641 641 641 641 641 641

Operating lease right-of use assets 205 208 208 208 208 208 208

Goodwill 289 289 289 289 289 289 289 289 289 289

Long term investments 59 58 58 58 63 63 63 63 63 63

Deferred tax assets 22 1,245 - - - - -

Other non-current assets 279 310 321 357 373 373 373 373 373 373

Total Assets

3,321 3,540 4,556 6,028 8,962 11,396 14,157 17,387 20,953 24,740

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable 823 796 1,041 1,201 546 562 467 359 253 143

Short term debt 70 136 - - - - - - -

Accrued liabilities 391 541 783 1,084 1,796 1,796 1,796 1,796 1,796 1,796

Other current liabilities 132 79 24 74 75 75 75 75 75 75

Total current liabilities 1,346 1,486 1,984 2,359 2,417 2,433 2,338 2,230 2,124 2,014

Long-term debt, net 1,435 1,325 1,114 486 330 330 330 330 330 330

Long-term lease 199 201 201 201 201 201 201

Other long-term liabilities 124 118 192 157 177 177 177 177 177 177

Stockholders' equity:

Common stock 9 9 10 12 12 12 12 12 12 12

Treasury Stock (119) (108) (50) (53) (131) - - - - -

Additional paid-in capital 8,334 8,464 8,750 9,963 10,544 - - - - -

Accumulated deficit (7,808) (7,754) (7,444) (7,095) (4,588) - - - - -

Total stockholders' equity 416 611 1,266 2,827 5,837 8,255 11,111 14,450 18,122 22,018

Total Liabilities and Stockholders' Equity

3,321 3,540 4,556 6,028 8,962 11,396 14,157 17,387 20,953 24,740

BALANCE SHEETS

(Millions $) (Unaudited)

Forecast

Cost of sales

INCOME STATEMENT

Forecast

Assumptions

20212022202320242025Perpetuity

2,900.822,743.573,162.733,508.793,718.23155,058.46

WACC 8.54%

Growth rate 6% Net Present Value 107,293.28

Weight of equity 89% Total shares outstanding1,215

Weight of Debt11% Book Value per Share88.31$

Equity 5837

Debt 708 Market Value97,266.00

Total value 6545 Value per share 80.05$

Cost of equity8.94%

Cost of Debt6.6%

Market risk premium 5.2%

Risk free rate 1.67%

Beta 2.06

Tax 21%

Year

FCF

(Millions $) (Unaudited)

2016201720182019202020212022202320242025

Net Income (33) 337 341 2,490 2,418 2,856 3,339 3,672 3,897

Depreciation and amortisation 144 170 222 312 312 312 312 312 312

Deferred Taxes (22) (1,223) - - - - -

Changes in operating activities:

Accounts receivable (90) (802) (644) (197) 576 (70) (80) (78) (81)

Inventories 12 (106) (137) (417) (421) (260) (299) (291) (300)

Accounts payable (27) 245 160 (655) 16 (95) (109) (106) (109)

Accrued liabilities 150 242 301 712 - - - - -

Other Assets/Liabilities (40) 16 21 (146) - - - - -

Net cash provided by operating activities 116 102 242 876 2,901 2,744 3,163 3,509 3,718

Changes in investing activities:

Capital Expenditures (97) (87) (152) (141) - - - - -

Other Investing Cash Flow Items (78) 41 (658) 695 - - - -

Net cash provided by investing activities (97) (165) (111) (799) 695 - - - -

Changes in financing activities:

Repayments of debt (110) (211) (628) (156) - - - - -

Additional paid-in capital 130 286 1,213 581 - - - - -

Interest (126) (121) (94) (47) (30) (30) (30) (30) (30)

Net cash provided by financing activities (106) (46) 491 378 (30) (30) (30) (30) (30)

Net change in cash

(87) (109) 622 455 3,566 2,714 3,133 3,479 3,689

Perpetuity

Free Cash Flow 19 15 90 735 2,901 2,744 3,163 3,509 3,718 155,058

Profitability

Return on equity -119.7%-5.4%26.6%12.1%42.7%29.3%25.7%23.1%20.3%17.7%

Liquidity

Current ratio 1.9 1.8 1.8 1.9 2.5 4.0 5.4 7.1 9.1 11.5

Quick ratio 1.3 1.3 1.4 1.5 2.0 3.3 4.5 6.0 7.9 10.0

Leverage

TIE (2.46) 1.01 3.73 6.71 29.13 104.06 122.70 143.31 157.49 167.08

Debt to equity 3.45 2.28 0.99 0.17 0.06 0.04 0.03 0.02 0.02 0.01

RATIOS

CASH FLOW STATEMENTS

Forecast

ADVANCED MICRO

DEVICES, INC.

20212022202320242025

Growth rate 37%15%15%13%12%

50%49%48%47%46%

Operating expense 19%19%19%19%19%

Interest 9%9%9%9%9%

Average Corporate Income tax 21%21%21%21%21%

2016201720182019202020212022202320242025

Net revenue 4,319 5,253 6,475 6,731 9,763 13,375 15,382 17,720 19,993 22,341

Cost of sales 3,316 3,466 4,028 3,863 5,416 6,741 7,536 8,463 9,365 10,296

Gross Income 1,003 1,787 2,447 2,868 4,347 6,634 7,845 9,256 10,628 12,045

Operating expense 1,386 1,660 1,996 2,237 2,978 3,544 4,217 5,018 5,972 7,107

EBIT (383) 127 451 631 1,369 3,091 3,628 4,238 4,657 4,939

Interest expense (156)(126)(121)(94) (47) (30) (30) (30) (30) (30)

Other expense, net 80 (9) - (165) (47) - - - - -

Profit before tax (459) (8) 330 372 1,275 3,061 3,598 4,208 4,627 4,909

Income tax expense 3925(7)31 (1,215) 643 756 884 972 1,031

Net Income

(498) (33) 337 341 2,490 2,418 2,843 3,324 3,655 3,878

Periods 12345

EBITDA 3,091 3,628 4,238 4,657 4,939

Weighted EBITDA 66,381

Weighted Average EBITDA4,425

Multiple 22

Value in millions 97,266

Shares outstanding 1,215

Price per share 80

Market Value 97,266

Total Shares Outstanding1,215

Market Value 80 Sum periods15

Periods 12

EBITDA 3,091 3,628

Weighted Average EBITDA3,449

Multiple 22

Value in millions 75,878

Shares outstanding 1,215

Price per share 62

Market Value 97,266

Total Shares Outstanding1,215

Market Value 80

Multiple Valuation

Assumptions

Cost of sales

INCOME STATEMENT

(Millions $) (Unaudited)

Forecast

Profitability

Return on equity -119.7%-5.4%26.6%12.1%42.7%29.3%25.7%23.1%20.3%17.7%

Liquidity

Current ratio 1.9 1.8 1.8 1.9 2.5 4.0 5.4 7.1 9.1 11.5

Quick ratio 1.3 1.3 1.4 1.5 2.0 3.3 4.5 6.0 7.9 10.0

Leverage

TIE (2.46) 1.01 3.73 6.71 29.13 104.06 122.70 143.31 157.49 167.08

Debt to equity 3.45 2.28 0.99 0.17 0.06 0.04 0.03 0.02 0.02 0.01

RATIOS

2016201720182019202020212022202320242025

GDP18,565,00019,520,00020,580,00021,430,00020,930,00021,921,00022,967,00023,913,00024,833,00025,783,000

Net revenue

4,319 5,253 6,475 6,731 9,763 13,37513,69215,77417,79819,888

37%15%15%13%12%

Forecast