Chain of Thought for DCF Valuation of Advanced Micro Devices (AMD) To determine the Discounted Cash Flow (DCF) intrinsic value per share for Advanced Micro Devices (AMD), we apply a two-stage DCF model. This projects free cash flows (FCF) over a 5-year high-growth period, calculates a terminal value for perpetual growth thereafter, discounts all to present value using the weighted average cost of capital (WACC), and divides by diluted shares outstanding to arrive at the per-share equity value. AMD has low net debt (~$3.89B debt vs. $5.87B cash as of Q2 2025), so enterprise value approximates equity value after minor adjustment.
Step 1: Gather Key Inputs Using data as of November 2, 2025 (pre-Q3 earnings on November 4):
- Trailing Twelve Months (TTM) FCF: $4.04 billion USD (as of Q2 ending June 2025; operating cash flow minus capex).
- High-Growth Rate (Years 1-5): 30% annually. This is a balanced estimate amid AI/data center tailwinds (e.g., MI300 chips), with analyst revenue growth at 28% for 2025 and 27% for 2026, but FCF tempered by rising capex (~$1B+ quarterly for fabs/AI). Higher forecasts (e.g., 56% unlevered FCF) exist but are aggressive; we use 30% for conservatism.
- Terminal Growth Rate: 3%. Standard for semiconductors, matching long-term GDP/inflation.
- Discount Rate (WACC): 11%. Averaged from sources (Finbox: 11.5%, ValueInvesting.io: 9.9%, GuruFocus: 14.45%), reflecting high beta (1.89) and sector risks.
- Shares Outstanding: 1.63 billion (diluted, Q2 2025).
All in USD; model computed for precision.
Step 2: Project Future Free Cash Flows Base FCF0 = $4.04B. Grow at 30% for 5 years:
- Year 1: $4.04B × 1.30 = $5.25B
- Year 2: $5.25B × 1.30 = $6.83B
- Year 3: $6.83B × 1.30 = $8.88B
- Year 4: $8.88B × 1.30 = $11.54B
- Year 5: $11.54B × 1.30 = $15.00B
Step 3: Calculate Terminal Value End of Year 5: FCF6 = $15.00B × 1.03 = $15.45B. TV = $15.45B / (0.11 - 0.03) = $15.45B / 0.08 = $193.14B.
Step 4: Discount to Present Value Discount at WACC = 11%:
- PV(Year 1 FCF) = $5.25B / 1.11¹ ˜ $4.73B
- PV(Year 2 FCF) = $6.83B / 1.11² ˜ $5.54B
- PV(Year 3 FCF) = $8.88B / 1.11³ ˜ $6.49B
- PV(Year 4 FCF) = $11.54B / 1.114 ˜ $7.60B
- PV(Year 5 FCF) = $15.00B / 1.115 ˜ $8.91B
- Sum of PV(FCFs) = $33.27B
- PV(TV) = $193.14B / 1.115 ˜ $114.68B
Enterprise Value (EV) = $33.27B + $114.68B = $147.95B.
Step 5: Derive Per-Share Value Intrinsic Value per Share = EV / Shares = $147.95B / 1.63B = $90.77.
Step 6: Interpretation and Sensitivity - Current stock price (Nov 1 close): ~$169 (derived from market cap $275B). Implies ~46% overvaluation, driven by AI hype but pressured by capex intensity and competition (e.g., Nvidia). Broader estimates diverge: AlphaSpread ~$172 (slight overvalue at higher prices), Simply Wall St ~$210 (undervalued), GuruFocus ~$49 (heavily overvalued).
- Sensitivity: If growth = 35%, value ~$117; if 25%, ~$73. If WACC = 10.5%, value ~$98; if 11.5%, ~$85. FCF upside from AI (e.g., data center revenue +115% YoY in Q2) could justify higher growth, but monitor Q3 for capex trends.
This model is directional; refine post-earnings via spreadsheet. DCF highlights AMD's growth potential but underscores valuation risks in semis. |
