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SUMMARY
Parkev Tatevosian, CFA, provides a detailed discounted cash flow analysis of AMD, projecting robust free cash flow growth driven by the company's strong position in CPUs and GPUs. Despite optimistic management forecasts and a healthy capital structure, the current market price of AMD significantly exceeds its calculated intrinsic value, leading to a hold rating.
MAIN POINTS
- Introduction of AMD's recent stock surge and the plan to assess its fair value using a discounted cash flow model.
- Forecasts of AMD's free cash flow quadrupling by 2030 and tripling again by 2035, driven by demand for CPUs and GPUs.
- Explanation of the weighted average cost of capital calculation, including cost of debt, cost of equity, and capital structure assumptions.
- Discussion of why companies balance debt and equity financing, highlighting the risks of excessive leverage.
- Comparison to Apple's capital structure strategy and expectation that AMD will increase debt and buy back stock to optimize costs.
- Conclusion that AMD's intrinsic value per share is $359, below the current market price of $466, resulting in a hold rating.
DETAILED ANALYSIS
AMD's stock performance in 2026 has prompted questions about whether its valuation is justified by underlying fundamentals. A discounted cash flow (DCF) analysis projects AMD's free cash flow to rise from $8.3 billion in 2026 to $36 billion by 2030, and further to $109 billion by 2035. This aggressive growth outlook is attributed to AMD's strong positioning in both the CPU and GPU markets, which are in high demand for data center applications.
Management's confidence in these projections is supported by increasing customer orders and long-term agreements, with forecasts being revised upward every quarter.
The DCF model incorporates a weighted average cost of capital (WACC) of 13.6%, derived from a 5.75% after-tax cost of debt and a 16% cost of equity, using a 10-year US Treasury yield of 4.5% and a market risk premium of 6%. The assumed capital structure is 25% debt and 75% equity, reflecting an expectation that AMD will gradually increase leverage as it matures, similar to Apple's strategy over the past decade. This approach aims to lower the WACC by substituting more expensive equity financing with cheaper debt, while remaining mindful of the risks associated with excessive borrowing.
After discounting projected cash flows and adjusting for non-operating assets and debt, the analysis yields an intrinsic value per share of $359. With the current market price at $466, the stock is considered overvalued relative to its fundamentals. The recommendation is to hold rather than buy, as the market price has outpaced the company's intrinsic value.
Previous buy recommendations were made when the stock traded at significantly lower levels, underscoring the importance of valuation discipline even amid strong growth prospects.
LINKS
- YouTube channel membership for exclusive perks and early access.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on evaluating publicly traded companies.
- Fiscal.ai investment research platform with viewer discount.
- Webull investing platform sign-up with bonus shares.
- Free monthly newsletter via Substack.