Up until now AMD has benefitted from a great deal of animosity towards Intel by absolutely everyone in Silicon Valley including Google Facebook and Apple. It didn't take much to realize that if you were building a laptop or building a data center intel was ripping you off. I know my employer (Google search) felt this way!
From Haswell (4000-series) to the 12000 series I would say there was maybe one generation of improvement in between and six marketing generations where nothing got better nothing got faster but prices were outrageous -$600 for a slow hot MacBook cpu, and everything got new marketing names!
So the industry has been desperate for an alternative to Intel since 2009 and AMD has finally delivered on the promise by building data center chips and adapting them to laptop use. I was an early AMD investor because of rx480 at $3.50 by the way but I sold out at $10.50.
From here on AMD will truly have to earn its keep and things will be a lot tougher as they are no longer the scrappy underdog anymore!
I don't think Intel will dominate like they did over the last decade but if their next process is good the idea that AMD is actually producing more value than them I think is quite stupid and driven by idiots who don't actually understand the chip business.
Good news for consumers either way though. Intel already have their crown back in the midrange at least.
I don't understand the stock valuations at all. I'm not a huge finance person, but Intel has a PE of <10 and pays a 3% dividend. AMD has a PE >40 and no dividend. Intel has their own manufacturing capacity and hasn't done a terrible job of catching back up to AMD. I can see if there's worry about ARM eating into Intel profits, but that should affect AMD too.
Toss in global politics with TSMC and Intel looks like a much safer bet long term. What makes AMD more attractive from an investment point of view? There's got to be some reasoning for it and I'd love to understand it.
A 40x P/E just shows the market pricing in the expectation that its AMDs earnings are going to continue to grow (probably by eating market share).
Imho paying a dividend is a pretty bad sign in this industry - they should be funneling everything in to R&D. Their 10x P/E reflects a belief that their earnings are going to remain relatively stagnant.
And you may be surprised that 80% of investor have absolutely zero understanding of any business. Looking at numbers is all they do. They may understand finance, but not business. Or at least their understanding are very shallow.
Right now the bet, or at least the market suggest, Intel wont be able to catch up to TSMC in terms of technological leads, and even if they do, they wont be able to do it as cheaply as TSMC. x86 is being eroded by ARM, and even ARM are not safe from the Riscy Silver Bullet.
The strange thing about the market in the past 20-30 years is how they view manufacturing and machinery as liability. For Intel without the technological moat ( in terms of leading edge ), Fabs are not viewed favourably by the market. Does it makes sense, of course not. But the the markets can remain irrational longer than you can remain solvent.
Intel is advancing their work far quicker than I could expect. While catching up to TSMC is still a tall order, at least they are finally innovating. Instead of saying No to their Custom Foundry customers they are now being challenged to deliver exactly what their customer demands.
Intel’s manufacturing capacity has been holding them back. If there next node is everything promised, it will at best have reached parity after many years, and there’s plenty of reason to believe it will fall behind at least one of their fabbing competitors again.
Also, it’s a massive risk.
If, for whatever reason, there is a drop in chip demand (which is entirely possible with a global recession, which is looking increasingly likely) Intel will be burning billions keeping their manufacturing running.
AMD, on the other hand, simply need to not place any more orders and offload the cost to TSMC and GlobalFoundries, etc.
Also, dividends probably impact PE negatively. Big investors invest money in companies because they have done their research and believe those companies will do a better job with their money than other companies. The company giving them a dividend back simply means they need to figure out something else to do with that money, which logically should be to reinvest it in the same company (since it’s the one their research says will currently meet their objectives best). The dividend has simply added a lot of operational costs, and in many cases and in many cases taxes, for something that is completely unnecessary for them.
Further, I suspect Intel is increasingly tying itself to the US, whereas AMD, while still heavily based in the U.S., isn’t doing that as much. If we do see a global technological schism, AMD will be able to straddle both sides in a way that Intel cannot.
Traditional stock valuations are completely out the window in this market, and will probably continue to be like that until the next major crash resets everything.
Stepping back, AMD has process advantage in x86 via TSMC and is executing very well. Clearly major opportunity to grow with low risk at Intel’s expense.
Meanwhile Intel has to implement some big changes to stay competitive, has major capex needs and is trying to break into markets where it isn’t present (or competitive) which is clearly risky.
Intel's $20 billion profit is quite a bit higher than AMDs entire revenue. The idea that amd's growth opportunities and Intels failures are so assured that amd should be worth more than Intel is laughable.
Profit isn’t the only measure - ROC is also highly relevant for companies with billions in CapEx. You can make a ton of profit with a low ROC and you will deservedly get a low valuation.
In any event no one is saying anything is assured only that some things are more likely or risky than others. Intel has a lot to do and recent execution has been weak. You may think that will change but the market will need evidence. AMD on the other hand is in the opposite position and gets credit for that.
Also you may think it’s laughable but there is no should about it - it’s a statement of fact that AMD’s market cap is more than Intel’s and that fact also plays to AMD’s advantage in some ways (acquisitions for example).
Sorry - Return on Capital. The point being that Intel can make huge profits but if that all has to be reinvested into new fabs and the market is sceptical of the return on that investment then they won't get much credit for those profits.
utterly off-topic but to my mind, Intel is a criminal monopolist, and has been proven so in court multiple times. Perhaps the chickens are coming home to roost?
> Stepping back, AMD has process advantage in x86 via TSMC and is executing very well. Clearly major opportunity to grow with low risk at Intel’s expense
I don't think this is necessarily true. AMD doesn't seem to do well beyond 35W TDP [0]. And for such "mobile" workloads we have a tough competition coming from ARM (specifically from Qualcomm's Nuvia team) by the end of this year [1]
Don't disagree but equally don't think that this invalidates either of my points here - they have access to TSMC manufacturing which is ahead of Intel at the moment. The volume they can put through TSMC's latest process is another matter and of course not every AMD chip will be able to take advantage.
To be clear, I don't think that the investment case rests on AMD outperforming Intel everywhere. They just have to be competitive for long enough in enough segments to take material market share and I think there is a very credible case for that happening.
If China moves on Taiwan AMD will go to nearly zero. If you're invested in AMD, either via equities or employment, make sure to hedge your position.
Edit: Curious if the downvotes are because you think AMD doesn't need TSMC, because you think China will absolutely never invade Taiwan, or if you think AMD can find another fab within a year or two.
(1) TSMC is building fabs in both the US (Arizona) and Japan (Kumamoto).
(2) China is unlikely to invade Taiwan anytime soon; the country is working on more of a diplomatic takeover a la Hong Kong.
(3) I don't know any reasonable argument for AMD not needing TSMC.
OK, I'll bite. What is this "diplomatic takeover" of Taiwan you speak of?
The historical circumstances of HK and Taiwan are nothing alike. Furthermore, the mainland communist party doesn't have any sway on Taiwanese politics, as far as I can tell ...other than as a common nemesis to unite against in relation to any issues that could affect the island's autonomy.
Taiwan has a subgroup of the population that wants peaceful reintegration with the mainland. They’ve dropped in numbers following the situation in HK, but they do still exist.
It's not KMT but a different group. Those who want reunification exist and often hold powerful positions.
China wants more of these people and are actively employing soft power in Taiwan to convert more to their side. I'm not sure what the intended time frame for success is, but China is in this for the long-haul.
Perhaps if things goes China's way, the PRC can strike a deal with the KMT for some sort of local governance, likely along with a name and flag change - or a third party could rise up and supplant KMT. Of course, either situation would kill off the DPP.
I'm not questioning the existence of such elements in Taiwan — including some group apparently so formidable that you can't/won't even mention its name.
No, what I find highly implausible is the notion that such an extreme "unification at any costs" ideology has any significant popular support. More so still in the aftermath of the PRC's recent suppressive tactics in Hong Kong.
I'm sure the scenarios you hint at are indeed explored at great lengths among Beijing-funded think tank strategists, but I can't see Xi & co being naive enough to elevate such an approach as their most viable course of action.
Not exactly true AMD is still doing a little bit of manufacturing at Global Foundries but that place threw up their hands in the air and quit innovating! So stuck at 10-12nm ...
Disagree. War with China is worse than sanctioning China. Abandoning Taiwan means deatabilizing the region (Japan militarizes, China opposes Japan. NK does whatever they want. South china see conflict leads to vietnam,philipines joining,etc...).
China is very important but the shipping lanes to SE asia and regional stability is more valuable. You can sanction China and get in a sanction war with them until one side gives in. Or a trade war like trump tried.
Their focus however is to win the war before it starts unlike the US which is to win the war after it starts (imo).
If it gets to a full in sanction like russia, the western economy will tak a massive hit, but it isn' beyond recovery and might actually be good to force resilent supply chains. Especially with silicon fab.
War with China is worse than sanctioning China, but likewise, war with Russia is worse than sanctioning Russia. There's a reason why NATO is content to stand by and do nothing.
I can't tell you what will happen if Taiwan is invaded tomorrow, next year, or twenty years from now, but I can tell you that the US will think long and hard about whether or not it will want to get involved. And it might well choose not to.
NATO can only do something if NATO is attacked first. It can't do pre-emptive attacks. It depends a lot on the party in power in the US as well as the sentiment towards China. A lot of working class people might see it as a way to prove why shipping jobs and manufacturing there was a bad idea.
How many years do you think it would take to build up those resilient supply chains? 5 years?
That's 5 years without most products from AMD, Nvidia, Tesla and every other TSMC customer. Samsung can absorb some of that business, but not much. Intel will shoot to the moon in that scenario.
TSMC is already planning multiple factories in the US, India,etc... So is Intel. Raw materials are what are most concerning. Either way, it would be bad for the economy but war is profitable and war time powers can bend a lot of rules/companies.
The vast majority of TSMC manufacturing will still be in Taiwan. The US fabs are mostly for national defense products that legally need to be completely domestically sourced from what I can tell.
Taiwan does not have any treaties with the United States, because the United States does not recognize Taiwan as a country, or have normal diplomatic relations with Taiwan, ever since the Taiwan Relations Act of 1979.
The US _did_ have a mutual defense treaty with Taiwan, but it was terminated by the Taiwan Relations Act after the US initiated diplomatic relations with the People's Republic of China on Jan 1st, 1979.
The $12B Fab which TSMC builds in Phoenix, will be outdated when it will open in 2024 and it is too small for AMD or Apple. It is likely it is mainly build to secure chip supply for the US military in case China invades Taiwan and the US does not have access to the TSMC Fabs in Taiwan any more. Apple and AMD will probably not be able to sell products for 1 year till they migrated to Intel or Samsung production in case TSMC fabs in Taiwan are not available for them any more.
The TSMC fab in Phoenix is build for 5nm and will open in 2024. The TSMC 3nm process should go into mass production in 2023, it is expected that the 2023 iPhone will use a 3nm SoC.
The fab will only produce 20k Wafers per month, the TSMC gigafabs in Taiwan produce 100k Wafer per month each.
> Apple and AMD will probably not be able to sell products for 1 year till they migrated to Intel or Samsung production in case TSMC fabs in Taiwan are not available for them any more.
Thanks for your assessment on this. Would you please share how you arrived at one year of a product sales gap?
Do you think it is possible for the US to bring 3nm process to the US while that is still relevant?
I’m skeptical of that. Yes, TSMC will have a plant or two left but a) AMD isn’t going to be first on line for whatever of the diminished capacity is left and b) I have to imagine it’ll be at least disruptive to operations to have the rest of the company disappear.
This seems to be heavily driven by the difference in their PE ratios. Intel's PE ratio is ~10, and AMD's is ~40.
For context, AMD's quarterly revenue is ~5B and Intel's is ~$20B.
AMD's quarterly net income is ~$1B and Intel's is ~$4.5B.
I'm surprised that AMD is valued higher, despite their revenue and profits being so much smaller. The financial markets are in essence betting that AMD will be able to achieve revenue/profit parity with Intel, despite the huge lead Intel currently has. It will be very interesting to see if that comes to pass.
I remember the days when AMD seemed to be on the verge of bankruptcy, and there was talk of Intel simply buying AMD since it was so cheap. Presumably that didn't happen because Intel feared anti-trust laws if it purchased its main/only competitor. Kudos to AMD for the turnaround - this competition is sure to be benefit the wider industry.
People keep forgetting that AMD is fabless, while Intel is not. You can't just compare their numbers without taking this important difference into consideration.
I really don't buy being fabless as an advantage for amd. It just means they're at the mercy of TSMC and maybe samsung. Especially with apple and it looks like Intel getting into the fabless design game it really just seems like the fabs will be able to squeeze all the profit out.
You don't have to "buy." Fabless as an advantage for AMD is not a story, it is actual history.
AMD used to run its own fab and nearly went bankrupt doing so. It spun off the fab as Global Foundries, and still couldn't catch up due to contractual obligations to use GF which was behind Intel. By eventually switching to TSMC (with new/renegotiated GF contracts; GF still makes glue chips on chiplets and also got some AMD stock), AMD beat Intel with more advanced process (it was already competitive in architecture).
Intel is now the one that's disadvantaged by using less than state-of-the-art fabs, the position AMD was in until about 5-7 years ago. Not only is Intel disadvantaged, it's doubling down on fabs, imagining that it will somehow overtake TSMC in the future.
Sure, and definitely made the right love spinning gf off, and it absolutely was instrumental in catching up with intel. But I’m not convinced that it’s an advantage over intel in the long run. TSMC will co to use raising prices as apple, intel, and nvidia all bid up the price of leading edge nodes. AMDs margins will always be worse than intels because of that. Intel doesn’t have to overtake tsmc, it just needs to be close enough to make reasonably competitive chips, which it’s already doing.
Stock valuations are driven primarily by present and future profits. Given that their profits are primarily coming from extremely similar markets, you absolutely can and should compare their numbers, especially their earnings.
I don't see how this disagrees with what I said. If you have huge capital expenses because you have your own fabs this will have implications for your future profit potential.
The market, net, thinks that Intel is going to shrink from a profitability perspective.
In 2022, Intel is going to have its first negative free cash flow in at least 15 years. It's going to have negligible free cash flow for the two years after. All of its cash flow and then some is going to build out fab capacity and node tech as it tries to dramatically increase capacity for its design business and its foundry business. Meanwhile, their most lucrative business segments, in particular datacenter, are getting gobbled up quickly by the competition. In Q1, Intel decreased -5% in cloud YOY despite that segment growing quickly.
If you believe that everything will go well with Intel, then this is money well spent and the stock is cheap. But given their historic difficulties and the quality and quantity of their competition in XPU design and manufacturing, there's a meaningful chance that their profitability will be greatly diminished.
Very little is due to Apple's shift away from Intel chips on Mac, but an enormous amount is due to Apple's shift to TSMC-manufactured Apple Silicon on iPhone.
iPhone is largely what created the sustained, predictable volumes for high-end chips that has allowed TSMC flourish, and TSMC is what has allowed AMD's strategy to take flight.
If AMD was stuck with GlobalFoundry, they would be nowhere.
What was it like working on these projects? Was it clear that the performance per watt was falling behind Apple’s expectations, and if so how was that felt in your workgroup?
Yeah. Just look at the performance per dollar ratio on mobile Intel chips right around Cherry Trail. Bay Trail and Cherry Trail lines were very good deals, and then core-m threw all that right out the window.
Do you mean the revenue loss of Apple's business, or Apple showing ARM is so capable in desktop and auguring the end of x86 dominance in server/desktop?
In five years or so (ok maybe 7 or 8) Intel turned a two year lead in fab technology to being behind by two years, so there's that too.
Utter inability to break into the mobile market, ARM or otherwise.
Failed attempts at discrete graphics and not having something ready for the rise of crypto/AI.
XPoint was basically a failuer, SSD dominance taken from them.
It shows both an empty cupboard of in house talent and technology and a zombie management structure.
No, it really isn’t. A brief DCF analysis shows AMD is heavily overpriced. There is a significant difference between tech sector sentiment and earnings yield. See also: Facebook.
DCF using ^TNX as discount rate: $70.93, with a 50% discount: $35.465. Current price as of Mar 5, 2022: $108.41.
If it's this easy, go start a hedge fund. You are literally leaving billions of dollars on the table by not.
An average first year finance student can do a "brief DCF analysis". They put garbage in for the cashflows and get garbage out for the valuation - and then write it up with high precision.
Not the person you're replying to, but I just wanted to point out:
andrewmcwatters.com boasts a $1400/day rate. That's not billions, but is still quite a respectable rate for their services. I assume they're well respected and trusted by their clients.
Hoever, in your comment here, you've mistaken some napkin math for a hard and fast assertion on their part and I think it's a little unfair. There's far more to a company's existence than DCF, all the poster did was point that out. It's obviously not that easy to run a hedge fund, but that's no excuse for sloppy facts here, or anywhere else for that matter.
As a counter-point AMD as a datacenter chip provider grew 100% last year and investors like myself view it as a catalyst of growth that begets more growth. More simply put: they are getting their foot in lots of doors. it’s stupendously difficult to valuate that just looking at the financials. AMDs renewed brand recognition also allows it to trade at better multiples
It's not the napkin math which is the issue - it's stating it as though future earnings are an obviously known, agreed upon quantity.
Napkin math of "I think they can sell x units at y margin with z fixed costs because of a, b and c, and I think that will grow at g because of whatever and my back of the envelope says that is worth $" would be great. Ie, real insight. Low precision, high accuracy insight with napkin math would have been wonderful.
I think the issue is that AMD's growth seems like it might hit significant headway. Samsung is having issues with their fabrication. We'd seen articles about AMD and Qualcomm wanting to move a lot of their chips to Samsung because TSMC was seen as too much of an Apple shop to their detriment. We've seen articles in the past month noting that Qualcomm is moving things back to TSMC from Samsung because Samsung's yields are so bad. The point here isn't that the sky is falling or anything, but that AMD does face some manufacturing constraints.
We've seen reports that Intel has secured a large amount of TSMC's 3nm production and it's safe to assume Apple has as well. Qualcomm will also be competing for fab space. In that environment, will AMD be able to keep pushing its advantages?
AMD has done great stuff over the past few years. Some of that has been helped by Intel's fab mishaps and TSMC's wonderful advances. That's not to downplay the many other things they've worked hard on. Many companies get openings and never take advantage of them. However, I think it's important to note that the opening is likely going to be narrowing.
If Intel is able to keep AMD away from TSMC's 3nm fabrication long enough for Intel's own fabs to get back to being competitive, what does that mean for AMD? Let's say that Intel 3 launches in mid/late 2023 and it's truly equal to TSMC 3nm. Let's say that Intel keeps AMD away from TSMC 3nm until 2024. What does that do to AMD's growth?
AMD is looking to launch TSMC 5nm Zen 4 processors in the second half of 2022. We've seen reports that TSMC is going to be making 3nm Intel hardware from July 2022. Do we see AMD 5nm processors in September and 3nm Intel processors in December?
Again, I don't want to take anything away from the wonderful work AMD has done. At the same time, I think most people would likely agree that with equivalent fabrication, Intel is as good as AMD if not better. If Intel is able to launch 3nm and box AMD out of 3nm for a while, that can offer Intel a while to leapfrog AMD on process - and possibly enough time to make sure that Intel's fabs get back in the game.
Yes, AMD had great growth in 2021 and they'll have some great growth in 2022. 2023? It seems like Intel might leapfrog AMD there.
Again, the sky isn't falling and I believe that AMD will have a lot of success in the future. It's more that it seems like AMD's growth will get stymied by Intel's use of TSMC and Intel's own fabs catching up. The idea behind AMD's current valuation is that they will become as big as Intel and even a lot bigger over the next several years. However, even with amazing growth in 2022, they won't become as big as Intel. In 2023, it seems like a lot of AMD's advantages turn into Intel advantages as Intel launches on TSMC's 3nm process. 2023 seems like it'll be a great growth year for Intel - at the expense of AMD's growth. I think AMD is in a strong position to continue being a great company with great products. I just think their growth slows as Intel fixes its problems. Of course, this all assumes that Intel fixes its problems.
Intel fab blocking AMD may impact AMD but it will impact Intel’s margins. I really hope Intel gets back on track with EUV, but 10nm was a major blunder and setback. TSM has the leading edge monopoly right now. There is a chance it stays that way beyond 2023.
FWIW: I want competition for the sake of progress, but I am bullish AMD for the next few years, and may be bullish Intel once they demonstrate their ability to shrink their process and execute IDM 2. Then they compete with AMD again… and TSM.
It was projected and widely broadcast throughout the industry 12 years ago that fabs were getting more expensive faster than any single design domain for semiconductors was growing! So the only way to build next generation fabs was to onboard new types of designs to offset the cost of the fabs which was doubling every two or three years!
Intel had the greedy stupid arrogant policy of going it alone for everything, and failed to onboard cellular (3x!) and AI and flash and tv and the list goes on and on and on .... Hence they wasted more than 10 years without onboarding a single new type of semiconductor into the Intel Fab production process! It doesn't matter if they designed the best chips in the Universe they can't keep up if they can't build the next generation Fab and they can't do it with CPUs alone so at the moment they are facing total financial destruction of in house CPU production!
Taiwan Semiconductor had the wonderful intelligent smart idea to crowdsource designs from all over the planet and of course that open market for foundry services is the only way forward and Intel was a fool for a decade at least! It's still not clear they can mend their ways!
Unless Intel proves it can succeed as a foundry, they're doomed - or will lose their fabs! It's not an easy transition to make for such a large company!
You seem to think it's a minor thing for Intel to pick itself up and start driving again. No. False. The other competitors have boarded jet airplanes (foundry model with much greater economies of scale) whereas intel still thinks it can compete in the cars (in-house fabs) of 50Y ago ..
That growth is only really because they fucked up so badly prior to Zen, Intel still make a lot more money than AMD so for them to be considered less valuable than AMD would have to be factoring huge amounts of undeterred growth i.e. intel continuing to fuck up, which I just don't think will happen.
Along with Tesla, AMD is a "won't go down but probably won't recover fully after a big crash" type of valuation.
40% growth when heading into a period of massive energy and food inflation along with a cessation of monetary stimulus? I think AMD may be a bit optimistic and isn't factoring in overall macro trends.
Still a lot better than Intel with 2% growth "when heading into a period of massive energy and food inflation along with a cessation of monetary stimulus".
I hope no one truly listens to this guy. He’s a number cruncher who thinks running calculations is all you need to invest. Listen to people who actually understand the market and how to profit from its sentiments, not math. The only “glory” these guys ever see is when stuff crashes and they say “I told you so”. Who wants that???
The stock market is usually correct about companies, you need to have a really good explanation for why it is wrong. Lots of people thought that Facebook or Google etc were overvalued. They weren't, even if you account for the low probability of them taking the market the combined valuation of every similar company together shows they weren't overvalued.
Interesting that you mention FB, considering it's just had a 40%+ drop over a matter of weeks. Compared to other FAANG, the drop is massive. FB is now only up around 30% compared to early 2017. If you'd bought GOOG or AMZN during the same time, you'd be up over 200%.
What warrants such a huge drop if the market was correct about FB? Seems to me like it was indeed overvalued, but the market just came to that realization a few months ago. Even though we're experiencing a broad selloff in the market FB has been hit way harder than comparable companies.
It was the earnings report that effected the drop. Users dropped for the first time in the company's history, potentially signaling peak growth, meaning it's downhill from here. I think the market acted accordingly and the drop was justified.
Correct about what? What people are willing to pay for the company at that point in time? Sure. What the value of discounted cash flows generated by a company over a span of years? Definitely not.
Yes, and those explanations are based on valuation strategies: discounted cash flow being the most generous, though also perhaps more "accurate" than other methods despite being very sensitive to changes in discount rates with historically low interest rates.
If you did discounted cash flow analysis on Facebook or Google, you'd find that despite their high price to earnings ratios, their earnings produced fair valuations, not overvalued ones.
No, they aren't. The explanations are based on different estimates of cashflows. As a concrete example - people didn't miss GOOG when it went public because of "valuation methods". People missed it because they didn't imagine that in 2022 a search engine company would be doing $75 bill a qtr of high margin revenue. People didn't miss AAPL in the late 90s because of "valuation methods", they missed it because they didn't see AAPL doing $90 bill a qtr of pretty high margin revenue.
Understanding the future cashflows of a business is really difficult stuff. Playing with numbers in a spreadsheet is really easy stuff.
I enjoy the definition of investing as an act of thorough analysis promising safety of principal and an adequate return, and all other behaviors otherwise bring speculative.
If you’re paying $42.14 per dollar of earnings there is a likelihood that more often than not you’re overpaying.
If you can’t pass simple mechanical litmus tests you’d better be damn sure, and frankly there just aren’t many exceptional companies where I feel damn sure about them.
Thorough analysis isn't what you are doing, it's simplistic analysis. That's the very problem with it. It sounds like you are dying for the Ben Graham era - when simplistic analysis based on financial statements was all that is required because the competition in investing was... not much. It's a very different game now, and you actually have to have deep insight into the companies and the industries they are in.
You can't just do a simplistic extrapolation of the last couple years in a spreadsheet.
Google couldn't pass your "simple mechanical litmus tests" when it went public.
Apple couldn't pass it in the late 90s.
Amazon couldn't pass it most of it's life.
IBM could for a good number of years (just look at the numbers when Buffett was buying it...)
Most of the banks could in 2005/6/7.
The mathematics of investing haven't changed, but if you have some literature to suggest otherwise, I'd be very interested in reading it.
You seem to think that I use these mechanical estimates as the primary method for purchase, but they are not.
I'm not sure what your point is about IPOs: they're historically a terrible time to invest, which is common knowledge.
And actually all of the companies you have mentioned have easily passed such litmus tests over their life time at different times. Sometimes they're overbought, some times they're oversold. If you buy when they're overbought, you'll end up with a lower IRR than if you hadn't.
The math hasn't changed - the competition has. All the insanely obvious stuff is gone. You need real insight now.
I didn't make a point about IPOs. I made a point about companies where real insight was required, both to see good investments and not make bad ones. Simple rules like "IPOs are bad", "dont pay x times earnings" etc, they haven't worked in years.
Same literature, different assumptions on how easy it is to predict cashflows or how to even go about it. A DCF is after all, discounting future cashflows.
If it's all as simple as you say - really - just go start a hedge fund. You can start an LLC in a day, throw some money into a brokerage account and be up and running. There are still plenty of LPs who will invest in a simple long only fund, even with vol, as long as the performance is good.
Exactly true the rise in the cost of next-generation fabs has completely changed the business model so that only foundries can survive. Benjamin Graham analysis is not capable of detecting this inflection point in industry strategy nor can it detect Intel's stubborn refusal to adapt and change!
Yup. And by all reports Ben Graham was a brilliant dude. If he were in the game today, I doubt he'd be playing the way he played back in the day. He'd get in there and figure it out.
I don't understand why you are getting downvoted. This statement that the market is usually correct is basically right. Maybe a better explanation is: something like 90% of the time 90% of companies are priced within 10% of the "true" valuation.
Exactly, media controls the narrative and people en masse are gullible to manipulations. The stock market in the short term is at best a perception, perhaps only on the long term reflects a normalized, economic reality
GME is the way it was because it is, effectively, not an open market of buyers and sellers, due to deliberate (if decentralized) manipulation. This is in contrast to the vast majority of other securities.
BTW, not only did you respond with smugness and a narcissistic sense of superiority but you ignore my question, which was an opportunity to display your expertise, were you to have any. You are out of your element with financial talk. Stick to programming.
If you have the time, please share a bit more detail about the modelling approach + assumptions used for the DCF. I'd find that pretty interesting and suspect others would also.
Whenever I've tried to run my own DCF analyses, I've found some parameters and modelling assumptions have a major impact on the resulting estimate. Discount rate parameter is one. The model and assumptions used to estimate revenue and operating/net profit when extrapolating 5 - 10 - 20 years into the future also make a large impact.
Suppose in our DCF analysis we aspire to forecast company performance over a 25 year time horizon and then discount the profits back to some NPV. Then we need some way of extrapolating the company's revenue for the next 25 years. One way to do this could be to put together some kind causal model where we identify the major factors that contribute toward generating revenue -- maybe this could break down revenue by segment or major product line, and attempt to predict supply, demand, price points, production capacity etc for each product line, using knowledge of how the industry works. Then we'd have to figure out how to forecast all of those drivers of revenue, e.g. forecasting the capex used to build new plant to increase capacity & so on. Another way could be to ignore trying to build a semi-plausible generative model for revenue and instead just do some kind of simple empirical model only -- e.g. fit a regression model to the trailing 5 years of historical revenue numbers or annual revenue growth rates combined with some kind of prior to force revenue growth to decay toward something unobjectionable the further into the future we project.
I've got some code that automates calculating a DCF. I've adopted some form of the latter approach to forecasting revenue -- fit a simple empirical statistical model to historical revenue -- it isn't very intellectually satisfying as it doesn't incorporate any real world knowledge about the causes of revenue in specific industries or companies. So, many forecasts of revenue generated by this approach will be quite wrong, leading to quite misleading DCF estimates. But on the other hand, I can run my kind of dumb DCF analysis in a completely automated way using inputs that are reported in company financials in a standard format, which is much quicker and easier.
When i run my crude DCF analysis over INTC and AMD -- using a somewhat arbitrary 6% discount rate -- I get the estimates
the "quantiles" are different scenarios of assumed future revenue growth trajectories. quantile 0.2 assumes relatively poor revenue growth. quantile 0.8 assumes relatively great revenue growth. quantile 0.50 is some kind of midline.
market valuation for AMD is either based on something that isn't discounted future earnings, or market's forecast for how future earnings will evolve is very different to my crude backward-looking model.
I use the most recent 5-10 years of earnings, assuming there isn't significant deviation therein. Line of best fit. Adjust for modest inflation. I haven't read any literature that suggests a better method, but would be inclined to discuss such techniques.
I use the 10-year Treasury note as a risk-free rate, which results in a share price much too high due to historically low interest rates. I do not have a reasonable risk premium that I otherwise use, as I have not yet found a sensible contemporary measure of such a premium. I do know that investing with a desired 10% real return is a relevant figure, but I don't have many other data points on that. As a result, I use a 50% discount from the resulting price to provide a margin of safety.
These are all roughly textbook constants that I use to serve as some mechanical "suggested basis [for] maximum appraisal for investment."
I also perform these in an automated way with publicly available SEC data... I don't believe that it is supposed to be intellectually stimulating. I think it's boring, and I'm fine with that. There is no simple mechanical process that will allow one to appropriately incorporate trade information and adjust valuations as a result. You don't know until you see the reports. And most of the time, not really even then. I don't know what the BOM is for plenty of products. I don't need to research that.
I don't enjoy analyzing companies that have too much at stake to produce their net earnings; even companies I personally enjoy I have a hard time convincing myself even with a fair value estimate that I'd like to own its common stock.
I do appreciate your reply, though. I'm more interested in these discussions than ones simply claiming how supposedly great or immoral or how much potential a company has. If I want opinions to fuel speculative theories, I can go to Twitter.
you've identified one of the key weaknesses of this general valuation approach.
trying to make forward-looking predictions extrapolating a decade or two out based upon backward-looking financial metrics may only make sense in situations where you have reason to believe that the conditions and dynamics that generated the past results will continue to persist for the next decade or two into the future (and it might not even make sense then)
Yup. And it takes a lot of work and requires a lot of insight to sensibly conclude the conditions will stay the same. Ie, either way, it's not simple. Warren Buffett gives these folksy sounding quotes which make it seem so easy, but he's a fanatic who has been fanatically watching businesses in detail for 70 years... and he still gets it wrong sometimes.
Buffett also achieved enough scale where he could buy a controlling stake in some small public companies. Amidst some of the folksy quotes, a fair bit of money was also made by Buffett & co sending in a new manager to a freshly acquired business to perform the ugly work of shutting down and selling unprofitable segments of the business and firing the associated staff. As a tiny retail investor in public companies without the ability to engineer a control situation, this kind of thing is not possible to replicate.
here's another anecdote you might find entertaining:
i invested in one company late last year based on an initial screen using this kind of extrapolation of historical financials, and a bit more reading through the company's annual reports to get a better feel of the business model. the business model seemed a little weird but the business' financials looked good, especially compared to the company's share price.
since then i've updated my expectations and expect to earn about -80% to -100% return on invested capital. i failed to read symptoms of possible accounting fraud that were signaled in public disclosures on the company website at the time i invested, and a few months later directors have resigned and been replaced, the company has been delisted for failing to file quarterly financials, and the company has released the results of an accounting probe that has explained how the former directors fabricated all of the company financials, starting off with dating sales before goods were delivered to customers, and ending with making payments to the company from their personal accounts and registering the payments as if they were sales from external customers.
part of operationalising this kind of valuation model into a profitable investment scheme also needs a supporting due diligence function, which in this instance i failed dismally at
This may be a naive tough but the unfolding of the ukranian events had me wondering again and again if more attention should be used when buying items coming from China and TSMC. The rise of the Ryzen CPUs had me switch to AMD from Intel after many years. Next time I could actually prefer the worst CPU as long as it is built in the west.
Is this an oversemplification? Am I wrong? Anyone here share similar toughts?
TSMC is actually a Taiwanese company and its most advanced fabs are in Taiwan, a democratic country (more or less, with its own passport, military, government, etc) that is not under the control of China.
If country A depends on the products of country B and vice versa, then a war between A and B may be ill advised. Untangling your supply chain is a prerequisite for successful war.
To add to that: If country A depends on products of country B, then country C could want to attack country B to hurt country A.
From Haswell (4000-series) to the 12000 series I would say there was maybe one generation of improvement in between and six marketing generations where nothing got better nothing got faster but prices were outrageous -$600 for a slow hot MacBook cpu, and everything got new marketing names!
So the industry has been desperate for an alternative to Intel since 2009 and AMD has finally delivered on the promise by building data center chips and adapting them to laptop use. I was an early AMD investor because of rx480 at $3.50 by the way but I sold out at $10.50.
From here on AMD will truly have to earn its keep and things will be a lot tougher as they are no longer the scrappy underdog anymore!