AMD Stock at $520? The $17 Billion Guide Explained

AMD at $520 after hours: the $17 billion guide

0:00 AMD closed Tuesday at about $484 a share, and by about 6 o'clock eastern that evening, it was trading around $520 after telling investors to expect about $17 billion of sales next quarter. To put that in perspective, 17 billion in one quarter would be more than AMD did in all of 2021. So if you own this stock or have been waiting for a reason to buy it, this is a very big report. In this video, I'm going to show you why the bulls are so excited, why the bulls are giddy.

0:25 I'm going to explain the billion dollar charge that made the profit look smaller, and I'm going to show you the one number in this report that I think matters more than the guidance. And that will tell you right now that number I'm talking about is not the 17 billion. My name is Blake. I dig up socks before the bull stampede so you're not buying at the top like Woah And today on 9to5investing we're talking about where AMD at $520 still makes sense.

0:48 Before we get into it, I want to make one thing clear. That $520 is just a price to stock traded out after hours on November 3rd. And it is not an analyst target or a prediction. And it could have definitely changed dramatically by the time I release this video.

What AMD actually reported in Q3

1:00 So what did AMD actually report? If you didn't already know, AMD short for advanced micro devices designs the chips that go into data centers, PCs, and gaming consoles. For the third quarter, revenue was $13.4 billion, which is up 45% from a year ago. And the biggest piece of that, by far, was the data center segment, which brought in a record 8.5 billion and grew 97% from a year ago. So nearly two out of every three dollars AMD brought in this quarter came from data center.

1:26 Now, I want to be careful here because that does not mean that all of it was AI chips. Data Center also includes AMD's EPYC processors, which are the regular server CPUs as well as its instinct GPUs, which are all the chips used for heavy AI work. Then you have the client segment, which is mostly PC chips, at 2.9 billion and embedded at 1.1 billion. Gaming was the weak spot. Down 40% to $773 million.

The guidance: about $17 billion next quarter

1:50 But the part that really moved the stock was the guidance, which is just management's forecast for the next quarter. AMD is guiding to about $17 billion of revenue plus or minus 3%, so somewhere between roughly 16.5 billion and 17.5 billion. At the midpoint, that is 27% more than the quarter it just reported. Investing.com reported that analysts were expecting about $16.2 billion, so if that estimate is right, AMD guided about $770 million above it.

Lisa Su on Q4 and the Helios customers

2:14 We expect that acceleration to continue in the fourth quarter, driven by increased demand for inference and agentic workloads and the ramp of our newest products. Helios is AMD system that puts its AI chips into a full server rack. And the release says that Anthropic, Meta, Microsoft OpenAI, and Oracle Cloud are running workloads on initial Helios systems. Now that is an impressive list of names, but I should tell you that the release doesn't say how much revenue is coming from each of them.

One quarter bigger than all of 2021

2:38 Now let's zoom out for a second. AMD did about 16.4 billion of revenue in 2021, 23.6 billion in 2022, 22.7 billion in 2023, 25.8 billion in 2024, and 34.6 billion in 2025. So in about five years, a full year of sales from 2021 is now less of what management expects in a single quarter. Based on our current visibility, we now expect revenue to grow more than 80% in 2027. That is the bull case and make no mistake, it's a strong one. But a forecast is not a sale, and there are a few things in this report that you should understand before getting too excited.

GAAP vs adjusted EPS: $1.46 or $2.09?

3:16 So now that we have the good news out of the way, let's talk about why there are two different profit numbers. AMD reported earnings of 1.46 a share under a gap, generally accepted accounting principles. My friend back when I was working as a financial accountant and as an auditor. So this basically just means the official accounting role is that every public company has to follow. but it also reported 2.09 a share on an adjusted basis, which is the company's own version that leaves certain items out.

3:38 That is a big gap. So as a former auditor and current CPA, I wanted to understand what got left out.

The $1.1 billion warrant charge

3:44 The biggest item was a 1.097 billion expense tied to warrants. A warrant is basically just a right to buy a company's stock at a set price. In an AMD's case, some of these warrants are tied to customer relationships. Now here's the part that a lot of people are going to get wrong. That 1.1 billion was not cash leaving the building. It is what's called a fair value adjustment, which basically just means that the accounting value of those warrants was updated, and the company recorded the change as an expense.

4:09 The amounts will vary each quarter based on AMD stock price and other valuation assumptions. These non-cash adjustments will not affect our non-GAAP results or free cash flow. So does that mean you can just ignore it? In my opinion, no. I cannot tell you the full terms of these warrants because that would take reading the underlying agreements. But warrants can mean more shares in the future, and more shares means your slice of the company can get smaller.

4:35 The other item worth noticing is 523 million of stock compensation. And that one is a real cost of paying employees, even when no cash goes out the door. So when somebody tells you AMD earned $2.09, that is true. And when someone else tells you it earned $1.46, that is also true. I would just make sure you know which one you're looking at.

The number that matters: free cash flow

4:53 Now let's get to the number that I promised you. and he reported $2.43 billion of GAAP net income this quarter. It's free cash flow, which basically is just the cash left over after running the business and paying for equipment was 554 million. In the year ago, a much smaller quarter, free cash flow was $1.53 billion. Think about that for just a second. Sales went up 45%, but free cash flow went down by two-thirds. Said another way, Free cash flow was only about 4% of revenue and only about 23% of net income.

Where the cash went: working capital

5:22 So where did the money go? And before you say, it was that warrant charge, it wasn't. Because we just covered that the warrant expense wasn't cashed in the first place. The real answer is what's called working capital, which basically just means the money tied up and running the day to day business. The cash flow statement shows about 3 billion going in inventory and about 1.9 billion going in receivables, which is the money customers owe AMD but haven't paid yet.

5:43 AMD offset part of that with about 2.3 billion from payables, which is basically AMD taking a little longer to pay its own suppliers. Now this is where you have to be fair because there is a reasonable explanation for this.

Stocking the shelves: the bull and bear reads

5:53 Think about a store loading up its shelves before the holidays. The money goes out the door in October, and the sales don't show up until later. If AMD is really about to grow revenue by 27% in one quarter, it makes sense that it needed to build up inventory first. During the quarter, inventory increased approximately $3 billion sequentially to $11.5 billion to fulfill our strong data center demand. And it is not like AMD is short on cash because it ended the quarter with 15.8 billion of cash and short-term investments against 7.1 billion dollars of debt.

6:24 So the bullish way to read this is that AMD is stocking in the shelves for a huge quarter. The bearish way to read it is that this kind of growth may demand a lot of cash before it ever pays investors back. And that customer warrants make the economics harder to read. Both of those are interpretations, and we won't know which one is right until we see the next few quarters.

Is AMD cheap or expensive at $520?

6:41 And that brings us to the question everybody really wants answered, which is whether the stock is cheap or expensive at $520 a share. Now, I want to be honest with you, I'm a little limited on what I can provide tonight. I don't have a clean updated PE ratio or an updated analyst price target for you today. That has not come out yet, but I will do a simple exercise instead. A PE ratio is just a stock price divided by a year of earnings per share.

7:03 If you take this quarter's earnings and pretend the company earns, that exact amount for four straight quarters, you get 5.84 a year under GAAP and 8.36 on an adjusted basis. At the close before earnings was around $484, that works out to about 83x GAAP earnings and about 58x adjusted earnings. And at $520, it is about 89 times and about 62 times. Now this is my own Napping Math and there's not a forecast and it definitely undersells the bull case because the whole point of this guidance is that earnings should be higher from here.

7:31 But it does tell you something important. At these prices, the market is already expecting a lot of growth. So one great quarter is not going to be enough. You're going to need subsequent great quarters after that to be able to sustain these prices. So is AMD a buy at $520? Nobody can protect the future and I cannot tell you what happens with the stock or the broader market as the days march on. In my opinion, this was a really strong report with a real growth story, and the question has moved from whether the demand exists to whether that demand turns into cash.

What I would watch next

8:00 So here's what I would personally watch before buying shares of this stock. The first thing is whether AMD actually delivers that $17 billion, because right now it is just a forecast. The second thing is the free cash flow, because if that inventory really was for a big ramp, cash should start catching up. The third thing is gross margin because management expects about 55% on an adjusted basis next quarter, which is down a little bit from 56%. And I want to see that hold as Helios scales.

8:23 And a fourth and final thing is the warrants because I want to know how much they could add to the share count over time. If revenue hits and the cash shows up, then I think the bull case gets a lot stronger. And if revenue hits, but cash keeps staying on the shelves, I'd be very careful about paying current market prices for AMD stock. Prices can also move quickly after a report like this, so please check where the stock is trading when you watch this.

8:44 This is just my opinion and not financial advice, it's never financial advice. So please do your own research before you buy or sell anything.

Your turn: huge quarter or ahead of itself?

8:50 So what do you think? Is AMD stock in the shelves or something huge or is the market getting ahead of itself at this point? Let me know in the comments if you found this helpful, please subscribe because it really helps the channel. Thank you very much for watching.