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Master Case Study: AMD: Valuation and Projections: Session I

Advanced Micro Devices (AMD) is one of the top makers of computer microprocessors. It had $2.86 billion in total net revenue for 1999. Their Athlon, Duron, and K-6x processors are considered to be some of the best processors currently available in today’s market. In 1999 alone, AMD sold more than one million Athlon chips. AMD’s chips power PCs from Compaq, Gateway, Hewlett-Packard and other leading manufacturers.

You want to invest in AMD stock, but are disturbed by the recent performance of the stock and the speculations running rampant about the industry. The stock is trading at $33 a share, 31% off its 52- week high of 48 dollars a share. There are rumors that the stock will fall further due to falling computer sales, in general, and that AMD will also suffer a decline in sales as Intel is suffering a decline in sales. However, AMD’s fourth quarter recovery in 1999 and the news that AMD’s recently released a giga-hertz Athlon processor outperformed Intel’s giga-hertz Pentium III processor bolsters your confidence in the company Should you take the risk and invest now while AMD’s stock is low? Or should you wait until it is more secure? Before you invest your children’s college fund, why not perform an analysis of the company.

You have all the information you need however, do not know what to do with the information. What do you want to determine? What is your objective behind doing the analysis? You may want to know the following:

  1. What is the right price for AMD’s share?
  2. Should we invest in the company?
  3. Is the share overpriced or under-priced?
  4. What assumptions are people making to justify AMD’s current stock price?

In trying to answer these questions, there are a few essential steps that need to be followed. These are:

Step One: Data Gathering

Step Two: Industry Analysis

Step Three: Understanding Management’s view of the future

Step Four: Performing Pre-analysis

Step Five: Setting future assumptions

Step Six: Projection of Proforma Financial Statements

Step Seven: Calculating the Cost of Capital

Step Eight: Valuing the company

Step Nine: Reality checks

We will walk you through the each of these steps using the information that we have available to us about AMD.

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