Advanced Micro Devices’ (NASDAQ:AMD) chief executive officer Dr. Lisa Su recently told CNBC that AMD sees “extremely strong” demand for PCs and its semiconductor chips. As a result, AMD stock will rise and investors might be able to assume to the company’s revenue and free cash flow growth will continue to surge.
Dr. Su joined CNBC’s “Techcheck” program on Jan. 4 and stated that the company was very optimistic about 2022. She told CNBC that they expect to have another big year for PCs. This means that the company is “ramping” up its supply of semiconductor chips.
She indicated that higher-performance PCs are now needed more by people working at home, and consumers want more premium and gaming devices. Consumers, work-at-home, and enterprises also want higher computer performance processors and battery life in their devices.
This will require more flexibility and optimization of computing for specific applications — known as heterogeneous computing. All of this leads to higher pricing for semiconductors, which is good news for AMD.
Where Things Stand At AMD
On Oct. 26, AMD released its third quarter financial report showing that revenue had risen 54% year-over-year to $4.313 billion, and was also up 12% on a quarterly sequential basis.
Moreover, the company was extremely profitable. Its operating profits were $1.055 billion on a non-generally accepted accounting principles (GAAP) basis giving it a 24.5% operating margin.
Moreover, the company also produced $764 million in free cash flow (FCF), based on its own calculations. I always like it when a company produces its own FCF figures like AMD does. It shows me that they are very confident in their ability to keep producing this ultimate measure of a company’s profitability.
The $764 million in FCF also reflects a margin of 17.7% on its $4.313 billion. This means that the company will continue to produce a lot of cash over the coming year.
For example, right now analysts forecast that in 2022 revenue will rise over 18% to $19.1 billion by the end of 2022. This is the average estimate of 37 analysts as surveyed by Seeking Alpha.
If we assume that the FCF margin will rise to 18% for all of 2022, it means that AMD will produce $3.44 billion in free cash flow over the year. That is a lot of FCF and will increase its balance sheet cash a good deal.
What AMD Is Worth
Moreover, it also increases the company’s valuation.
For example, if we assume that eventually, the market will value AMD’s FCF at an FCF yield of 1.5%, its market value could hit $229 billion. This is the result of dividing $3.44 billion FCF by 0.o15.
This $229 billion target valuation is well over the present market value of $174.4 billion. It implies that AMD stock will be worth 31.5% more than its price today (i.e., $229.3b/174.4b – 1).
This puts its price target at $177.62 per share (i.e., 1.351 x $135.07 price today). That is 35.1% over the price as of Jan. 6.
What To Do With AMD Stock
Other analysts are not as sanguine about AMD stock.
For example, Tipranks.com reports that 23 Wall Street analysts have an average price target of $143.15, or only about 6% over today’s price.
That is not much higher than today’s price. But most of these analysts have been behind the curve during all of last year.
AMD stock rose 56.9% last year, rising from $91.71 to $143.9o by the end of the year. Most of these analysts did not predict this. That is why I have more confidence in my forecast. This also coincides with Dr. Su’s comments about strong demand and ramping up supply to meet this demand.
I suspect that what will happen is that analysts will continue to ramp up their forecasts as the year goes on, just as they did last year.
The bottom line is this: expect to see AMD stock to rise at least 35% this year to $177.62 per share.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.