The final time I wrote about Superior Micro Gadgets (NASDAQ:AMD) was in mid-October. On the time, I argued that the corporate ought to use AMD stock for the whole Xilinx (NASDAQ:XLNX) acquisition, which on the time was nonetheless solely a risk, and never a certain factor.
Lo and behold, Chief Government Officer Lisa Su introduced on Oct. 27 that it could purchase Xilinx for $35 billion, with shareholders getting 1.7234 shares of AMD for each Xilinx share. Publish-completion, AMD shareholders will personal 74% of the mixed firm, whereas Xilinx shareholders will personal the remainder.
The acquisition price values the mixed entity at $135 billion. If it closes by the top of 2021, Lisa Su will proceed as CEO of the mixed firm. Present CEO of Xilinx Victor Peng will develop into president and handle the Xilinx enterprise together with some strategic progress initiatives.
Because the announcement, AMD stock is up 23% and is buying and selling perilously near $100. That is the stock’s second run at $100. Can it stick this time?
I’ll take a look at either side of the argument.
AMD Stock Is Able to Run
Neglect Xilinx for a second, and contemplate AMD’s enterprise to this point in fiscal 2020.
AMD reported its third-quarter outcomes concurrently its acquisition of Xilinx. The corporate’s gross sales grew 56% year-over-year to $2.eight billion. Sequentially, they rose by 45%. When it comes to working revenue, its earnings grew by 141% over final 12 months to $449 million — a 160% enhance on a sequential foundation.
The enterprise is way stronger in the present day now that it routinely generates free cash circulation (FCF) every quarter. In Q3 2020, it had FCF of $265 million, up from $179 million a 12 months in the past and $152 million on the finish of June’s second quarter. Within the first 9 months of fiscal 2020, it had FCF of $297 million, up from -$124 million a 12 months in the past.
Over the previous three fiscal years, its trailing-12-month FCF has gone from -$130 million in 2018, to $280 million in 2019, to $700 million in 2020 by the primary three quarters; it’s more likely to go over $1 billion as soon as the fourth-quarter outcomes are in.
For those who use enterprise values of $18.80 billion for 2018, $53.6 billion for 2019 and $115.eight billion for in the present day, its FCF yield really stayed round 0.6%, regardless of the very fact its enterprise has dramatically strengthened over the previous 33 months.
To me, that means regardless of the large run, AMD stock shouldn’t be overvalued relative to earlier years. It may not be low cost, however primarily based on its historic averages, I feel the positives far outweigh the averages.
And that doesn’t even take note of what Xilinx may imply to its future progress.
Assuming the deal will get finished in 2021, I feel Xilinx buyers can anticipate to be holding AMD shares worth greater than $82.98 a share later in 2021.
It’s Able to Take a Breather
AMD’s efficiency over the previous 5 years has been so off-the-charts good — its five-year annualized complete return by Dec. 15 is 110.3% — that its year-to-date complete return of 111% appears virtually odd by comparability.
But, as I said in my October article, up 3,849% over the previous 5 years, it appears logical that regression to the imply would hit AMD stock sooner or later. Additional, like Murphy’s Regulation says, it should rain on AMD’s Xilinx parade sooner or later in 2021.
That’s good, no?
The issue is, if the 2 firms hit regulatory hiccups, and AMD’s share price retreats into the low $70 vary the place it traded as not too long ago as early November, the deal isn’t wanting practically as engaging for Xilinx shareholders.
As InvestorPlace’s Dana Blankenhorn said on the time of the announcement, the dangers to each firms’ shareholders are actual.
“No cash is being exchanged within the AMD-Xilinx deal. It’s all stock. For the $35 billion price to carry, AMD stock should keep robust by the top of 2021, as a result of it should take a 12 months to get this previous American and (maybe extra necessary) Chinese language regulators,” Dana wrote on Oct. 29.
“In the meantime, the world will flip. Intel’s numbers had been down as a result of knowledge facilities slowed their spending. Giant cloud firms more and more dominate this market. There have been 541 cloud knowledge facilities at mid-year with one other 176 within the pipeline.”
Basically, Dana argues that Intel (NASDAQ:INTC) will rebound in 2021 as buyers understand that the corporate will bounce again from its downturn previously 12 months.
I discover it arduous to consider that AMD stock isn’t going to face some volatility within the 12 months forward. Buying and selling at greater than 13 occasions gross sales, about 3 times its common a number of over the previous 5 years, any dangerous information may put $100 on ice for a big chunk of time in 2021.
The Backside Line
I proceed to consider in Lisa Su. So long as she’s in cost, it’s a superb long-term maintain.
“As I’ve noted several times in the past couple of years, she’s one of the best CEOs in America and worth every penny of her $58.5 million in 2019 total compensation,” I wrote in October.
And the very fact Su was in a position to make use of 100% stock to pay for Xilinx is one other feather in her cap. Transformative in nature, shareholders will neglect concerning the dilution 5 years from now.
Do I feel it should stick above $100?
AMD reviews its This fall 2020 outcomes on the finish of January. They’re going to be rock-solid. Because of this, I feel it’s received a shot to remain in triple digits for an prolonged interval.
That stated, in the event you don’t personal AMD stock and are concerned with shopping for, you may wait till you will get some within the $80 vary. It’s certain to have a hunch sooner or later within the first half of 2021.
Lengthy-term, I proceed to love AMD.
On the date of publication, Will Ashworth didn’t have (both straight or not directly) any positions within the securities talked about on this article.
Will Ashworth has written about investments full-time since 2008. Publications the place he’s appeared embody InvestorPlace, The Fintech Zoom Canada, Investopedia, Kiplinger, and a number of other others in each the U.S. and Canada. He significantly enjoys creating model portfolios that stand the check of time. He lives in Halifax, Nova Scotia.