3 Reasons to Consider AMD Despite Its High Valuation

[MUSIC] Anand Chokkavelu: Welcome to the latest Motley Fool Scoreboard. I'm Anand Chokkavelu and we've got long time Fools, Toby Bordelon and Rick Munarriz giving a 1-10 rating to a money ball wreck. It's Advanced Micro Devices, maybe better known by its ticker symbol AMD. First we'll rate the strength of AMD's business, including factors like industry and competition. Ten's invincible, a one is hopeless. Toby's at an eight, Rick, you're at a seven. Rick Munarriz: A generation ago, Advanced Micro Devices with a spunky upstart taken on Intel in the microprocessor market. These days, AMD may as well stand for another market driver. These days, it's an AI play with its server CPUs fueling data centers and its DPU shipments tackling AI infrastructure. It's still a player in the gaming market, which was also part of its original roots, but that business has declined to just 7% of AMD's revenue in its latest quarter. I went with a seven. Toby Bordelon: A, for me here. This is a high quality business and one that has improved over the past decade or so. I think it's grown into a much more diversified computing business here, selling a wide range of chips, including semi custom chips, the data center focused chips that Rick was talking about. Those are all the rage right now, and that's really driving their growth. Competition is still tough here. NVIDIA, the clear number 1. I don't think we can argue otherwise, but AMD is still a major player in this space. Anand Chokkavelu: AMD's come such a long way in the years we've seen it where it was also ran at Intel and just a prayer at one point but now it's legit. Let's see how you rate the rest of AMD's business. Let's talk management. A 10 is Warren Buffett, a one is Homer Simpson. Both of you have nines this time, Rick. Rick Munarriz: A lot has happened since Lisa Su became CEO in 2014, when the stock was trading for about $3 a share. Obviously, it's about 160 bagger now for starters. It runs in the family. Her first cousin, once removed, is NVIDIA's Jensen Huang. Su became the first woman to be named Time Magazine, CEO of the year of 2014. Time Magazine apparently has a CEO of the Year category, and she tapped that again, in 2024 after completing the wealth altering transformation at AMD, she has 95% approval rating, according to Glassdoor or how 19 out of every 20 employees would say, so sue me. Toby Bordelon: Ninety-five percent approval rating is something else. I got to agree there. A nine for me too, great management. Lisa Su is arguably one of the best out there right now, I think. She became CEO just two years after she joined AMD. She joined in 2012. I believe it was COO, they made her CEO two years later, led the company since then. They've made a series of smart acquisitions under her tenure to broaden the portfolio to enter new markets. That's worked really well for the business too. Su has definitely earned the benefit of the doubt from me, and I think from anyone who's looking at this company, AMD is the better for having her at the helm, for sure. Anand Chokkavelu: I had to look it up. Jensen Huang, 98% approval rating, but both ridiculously high. For financials, a 10 is a fortress, a one is yikes. Toby's at an eight, Rick, you're at a seven. Rick Munarriz: Revenue is growing faster than it has since the spring of 2022. Its guidance calls for the top line to accelerate again to 45% growth in the current quarter. Momentum should continue as its strongest growing business becomes a larger overall contributor. Net margin is widening for the third year in a row. There's a case to be made that this isn't the same cyclical business as it was in the past, given the long tail of the AI boom. I agree somewhat, but if Wile E Coyote finds himself over the cliff in this rally, there's a lot of air to ponder when it all went wrong on the way down. It's why I can't go higher than a seven for this. Otherwise, stellar turnaround beep, beep. Toby Bordelon: I'm a little bit higher, Rick, a little bit. Went with an eight here. The financial situation does look solid, 38% of revenue growth in Q1 of this year. Much of that from the data center business. That grew 57% year over year. That is clearly driving the growth right now. Over half of the revenue for the quarter was from the data center business. Broadens are looking good, too, as you know, very healthy balance sheet. I love that; 5.6 billion in cash, 6.8 billion in short term investments, just 3.2 billion in debt. They have a lot of room to take advantage of opportunities that are in front of them should they choose to do so. Also, nearly three billion in operating cash flow, just in the first quarter. That's fantastic. You really like the financial position of this business. Anand Chokkavelu: Toby, let's move on to valuation. How well will AMD's stock do over the next five years? How safe is it? Ten's a sure thing, one's a lottery ticket. Toby Bordelon: I'm going to go 5-10% on returns. I want to say the high end of that, but I don't think the growth numbers we've been seeing recently are sustainable forever. The company will do well, I'm sure it, but the massive growth industry it is right now, I don't think continues for five years or so. Eventually, things are going to start leveling off. On safety seven, I think the biggest risk here is valuation. There is no real risk, I can see to the business itself. Even if you get a data center slowdown, you'll see a stock pullback for sure, but the business is still going to do what they do. That's the reason for my slightly low score on safety. Rick Munarriz: I'm kidding by looking over Toby's shoulder and copying his answers exactly this time but it's how I feel, too. I think it may be closer to the 5% than the 10%. The stock has more than quadrupled over the past year at the time that we're recording this, and that's going to make a valuation argument harder to make. The stock is moving higher faster than estimate revisions. AMD is now trading for roughly 40 times next year's analyst profit target. You can keep it in the family and buy the faster growing NVIDIA for half that multiple. Anand Chokkavelu: Well, thank you to both Toby and to Rick. They've given AMD a solid overall score of 7.2/10. For top hits, Rick mentioned it. He prefers NVIDIA. Look out for a new scoreboard every market day at 7:00 PM Eastern. Next up is CloudFlare, till then Fool on. [MUSIC]