Explaining Advanced Micro Devices’ Light Free Cash Flow
The overly bearish article on AMD (NASDAQ: AMD), based on light FCF (free cash flow), is unjustified for a chip company in the midst of accelerating its biggest product launches in the history of the company. Such worries may keep the stock price down but not for very long. As revenue grows above the 25% annual rate, the stock will respond favorably.
An article that based AMD’s overvaluation to the weak FCF guidance is flawed. Because the chip company is launching 20 products in 2018, all at different phases of getting to market, it necessarily allows for higher inventory, low FCF growth, and profit margin in the 25 – 35% range. A more healthy semiconductor firm would report profit margin in the 50 – 70% range. Intel (NASDAQ: INTC) is up there in its profitability for PC chips but its success is a rear-view of the health of the business. Intel does have the R&D and advertising funds to support its business but AMD is doing what it can with the little resources it has.
And AMD is doing a good job.
Vega GPUs are selling well-above MSRP. Ryzen performs better than Intel ships at similar price points. Threadripper is trouncing Intel’s HEDT CPU at lower prices. EPYC servers are early in its launch.
The takeaway is that investors need not look at AMD’s FCF numbers. That will grow sharply in time as product sales ramp up.