Krause Fund Research Fall 2018

Advanced Micro Devices, Inc. (NASDAQ: AMD) Technology (Alpha)

November 9th, 2018 Stock Rating: SELL

Analysts: Target Price $12.95 – $17.35 Jintao He Weiqing Yan [email protected] [email protected] Investment Thesis

The Advanced Micro Devices, Inc. (“AMD”) is a semiconductor manufacturer that produces microprocessors used in industrial control and automation machinery, medical imaging, avionics applications, and telecommunications. With the target price of $12.95 - $17.35, the stock appears to be overvalued. For this reason, we recommend a SELL rating.

Driver of Thesis

 Technology Change and Product Innovation - AMD’s new CPU, 7nm microprocessors, are equipped with more computing power and compatibilities, both of which will challenge Intel’s dominant position in the CPU market.  Margin improvement – AMD currently has a much lower gross margin (34.21%) than the industry standard (44%). AMD could gain a higher margin in 7nm CPU / GPU and 7nm server chips.

Risks to Thesis

 Size is not everything – When compared to Intel’s 10nm chips, AMD’s 7nm microprocessors share more similarities than differences, including the chip architectures, logic working cells, and overall performance. IBM is in the 5nm game –Samsung, IBM and Global Foundries have been working on 5nm since 2017.  No perpetual advantage for AMD – Samsung and Intel can quickly Company Description crush AMD’s new 7nm technology since they are able to invest more in R&D. Advanced Micro Devices, Inc. (AMD) is a multinational semiconductor company headquartered in Santa Clara, California that was founded on May 1, 1969. AMD manufactures microprocessors, the essential processing unit for Earnings Estimates modern computers and servers. AMD operates in two segments: the Computing and Graphics; and Enterprise, Embedded and Semi-Custom segments1. Intel is the most significant rival to AMD in the market for X86-based microprocessors. AMD and NVidia has maintained the duopoly in the GPU market after acquiring ATI technology in 2006. In 2012, AMD moved into the server CPU market by accruing SeaMicro, Inc.

Relative Financial Performance

12 Month Performance 70 60.5 60 50 44 40 34.21 30 25.1 20 14.4 7.04 10 0 P/E ROE Gross Margin

AMD Industry

Source: Ycharts U.S. semiconductor Source: FactSet Page | 1

Executive Summary Unemployment rate

On behalf of the University of Iowa Krause Fund, our team A low unemployment rate is a good sign for both AMD and the of equity research analysts recommends a SELL rating for semiconductor industry. As the unemployment rate remains low, Advanced Micro Devices, Inc. We based our decision after there is a stable disposable income for the public to spend on extensive research and analysis at both the macro-level and new personal computers, server-based cloud services, and other the company level. microprocessor related segments.

Having considered the macroeconomic environment and The chart below indicates that the U.S. currently has a 3.7% company-specific opportunities, as well as the risks, we unemployment rate, with the annual mean of 5.77%, which believe that our models support our recommendation of the is all-time low within the past five years. We expect that the SELL rating. Although the general market environment for unemployment rate will continue to be less than 4% over the semiconductor industry is favorable, there are high levels of next 6 months. This low unemployment rate indicates a competition within the industry and of uncertainty on future potential positive impact on AMD’s revenue. However, international trade regulations. Therefore, we conclude that there is also the potential risk of inflation, due to the the target price of AMD’s stock will fall between $12.95 increase in wages, which may result in both increased and $17.35. COGS, and decreased net income and margin, at AMD.

US Unemployment Rate (%) Economic Outlook Real GDP

There is a strong correlation between the growth of the semiconductor industry in the U.S. and the U.S. real GDP. It is essential for us to track previous data and project the future growth of the industry.

In September 2018, the U.S. real GDP growth rate increased at an annual rate of 3.24%2. As Figure 2 below shows, the U.S. real

GDP has been increasing rapidly since 2009, fully recovering Figure 3 (Source: S&P 500 PE Ratio) from the 2008 financial crisis.

Despite the current trade war between the U.S. and China, the Interest rate United States is still one of the strongest economies in the world. As such, we expect the real GDP to remain stable at around In addition to an increase in wages and the subsequent potential 3.0% with the GDP growth around 2.5%. With the steadily risk of inflation, the Federal Reserve also raised the FED Funds increasing GDP, the microenvironment should provide a steady rate in September to 2.25%. As the chart below shows, the demand for the semiconductor industry. However, the trade war interest rates have hiked since 2017. between the U.S. and China might cause some companies, in the semiconductor industry, including AMD, to over-produce or The rise in interest rates led to a rise in the cost of debt for all over-place their orders. In general, however, we expect both a companies in the semiconductor industry. The interest hike has steady increase in the U.S. real GDP and consistent demands in had a significant impact on AMD, due to the company’s future the semiconductor industry. debt, which is presently $1,704 million. Until AMD pays out the full debt amount, higher interest rates will result in higher U.S. real GDP Growth Rate (%) interest payments. Meanwhile, higher interest rates also mean a higher cost of debt to finance AMD’s future projects.

We believe that the Federal Reserve will raise the interest rates before the end of 2018 in order to achieve sustained economic expansion.

Figure 2 (Source: S&P 500 PE Ratio)

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U.S. FED Fund Rate (%)

Global Semiconductor sales

Figure 4 (Source: TradingEconomics) Figure 6 (Source: FactSet Semiconductor industry)

Strengthening Dollar The semiconductor industry is known for being small, fast, and cheap4. For example, new technologies in the industry will lower The increasing strength of the dollar is likely to put pressure on the cost of chip by 50%. As a result, companies in the industry the United States’ exports. AMD strongly depends on its have the constant pressure of producing cheaper and better revenue from international sales. In 2017, AMD reported that products. Even when the market is low, the industry will 66% of its total sales were from Asia, while only 26% of its total continue to upgrade and develop new products. sales were conducted in the U.S. Also, 33% of AMD’s total sales were from China, including Taiwan3. Products These international sales are highly sensitive to currency changes. The following chart shows how the US dollar has The industry offers four primary types of product: increased in strength since 2014. In the next 12 months, we expect that the US dollar per Chinese Yuan will continue to increase. This will likely have a negative influence on AMD, as well as some other companies in the semiconductor industry whose secondary market is China-based.

Figure 7 (Source: IBISWORLD)

 Memory chips: Memory chips are the storage house for a computer’s data and information; they also help the computer process the data. Figure 7 shows that memory chips contribute to 23% of the total amount of products produced in the market.

Due to the extremely low margin in memory chips, most Figure 5 (Source: Bloomberg quote: USDCNY) companies in the semiconductor industry do not produce the memory chips. Samsung, the monopoly in the memory chip market, controls 35% of the total market share. Industry Analysis  Microprocessors: Microprocessors are the basic and crucial central processing unit for the modern PCs and servers, The semiconductor industry involves various companies that containing logic operations to compute. From 2013 to 2018, design and produce: high-value and commercial type circuit the microprocessors remained their steady annual market boards, microprocessors, computing process units (CPU), shares of 45% of total products in the industry. memory chips, integrated circuits, fuel and solar cells, all of Microprocessors segment had steady annual sales increase which are essential to the personal computers and data of 1.7% even with 2015’s negative increase of 0.3% and processing servers. The following chart depicts the steady annual 2016’s -0.9%. sales growth (9.5%) of the industry over the past ten years globally. We believe that the industry will continue to grow at a However, the microprocessor companies in the U.S. faced rate of 9% over the next five years. the challenge of lower-cost producers, particularly from Page | 3

Asia, which may cause the segment’s sales to drop in the Major markets U.S. market and hence, the revenue may decrease.

 Commodity Integrated Circuit: The commercial standard commodity Integrated Circuit is the operating core for most commercial circuits, which provides computing power and calculation algorithm. The products are used in various products, including cell phones. Commodity Integrated Circuits contribute 23% of the total industry revenue. The sales on this segment have been increasing for five year with the steady increasing rate of 2%.

Demand Determinants Figure 8 (Source: IBISWorld) The Semiconductor industry has the following major demand determinants:  Technology Change and Product Innovation Exports  Product Life Span The biggest portion of the industry came from countries outside  Reach and Development Expenditures the United States. In 2018, exports contribute 56% of the total industry revenue7. However, the size of the segment has been New technology and Products innovation shirking 3.5% since 2013, largely due to the global competition Innovations and the use of new technology in the semiconductor and strengthening in dollars. However, exports are still the industry have strong correlation with the increasing demand. largest segment so far in the total industry sales. The following Consumers expect the company in the industry to continue chart shows that 64.3% of the total export revenue is from revolute their existing products. Meanwhile, the development Asia/Pacific area. In 2017, AMD had 70% of its total revenue and the evolution of other electronics, such as personal came from outside the United States. computers and smartphones, also demand the products innovation for their corresponding semiconductors. Additionally, 2017 Geographic Revenue vs Domicile (%) the impact of new technology and products innovation will easily set up a new industry standard, which results a company suddenly gain or loss large amount of its market share from its competitors.

Short product life span Semiconductors and central processing circuit incorporating semiconductors have a relatively short life span compare to products in other industries, which average from three to five years or as short as 18 months depends on the certain products5. Thus, demands on certain semiconductors are determined by their product life span. On the other hand, new technology and production innovation will extend the product’s life span and lower the demand for the replacement.

High Research and Development Expenditures According to IBISWorld, the U.S. semiconductor industry has Figure 9 (Source: FactSet semiconductor industry) the highest research and development (R&D) expenditure among all other industries6. The industry bench of R&D expenditure has Personal Computers already reached to $34 billion excluding the private institutes, PC segment has been growing at a steady annual growing rate of such as research universities. We expect that more research 2% over the last five years, consuming the shares from the partnerships and universities invest more into the semiconductor servers and desktop segment. The industry shows that the trend R&D in order to keep path of the rapid technological, even more of shifting the focus from desktop computing-based chips to R&D expenditures from the companies inside the industry. more power efficient processing unit, which is used for the portable devices. Meanwhile, companies like NVidia, Qualcomm and AMD are putting heavy focuses on specialized processing units in PC (e.g. graphics process units, 7nm central processing unit).

Communications equipment Companies in the semiconductor industry traditionally produce communication equipment, which is largely used in the telecom industry. In 2018, the communication segment accounts for Page | 4

13.9% of the total industry revenue8. The segment has shown an High competition in the industry and the trend is increasing. increasing trend since 2013 because of the technology The integrated circuits market has shown high competitions improvement in smartphones, tablets, and other portable among companies over past five years, e.g. Intel and AMD. The communication devices. We expect the segment continue to companies include the following factors while setting their grow in the future because of the potential commercialization in market strategies. the 5G communication system.  Price: Companies will outsource the production and Automobile and consumer electronics packing processes to foreign companies in order to lower With the expansion of the communication segment, the sales of the costs and maintain a lower price which is than that of automobiles are also increasing. In 2018, the automobile their competitors. segment is expected to have 5.9% of the total industry revenue8. However, different from the other segments, automobile  Production output: With the increase in the production microprocessors are usually simple “embedded system” chip, volume, companies often experience decreasing which aimed to perform fewer computing tasks. Due to the accumulated costs; hence, lowering their prices. Thus, chip’s simplicity, automobile segments have much margin than companies in the industry often have over-production or other segments have. Companies rely heavily on price over-ordering situations in supplies while trying to control competition. the production cost.

Industrial and government  Product performance: Products’ high performance, In 2018, the industrial and military demand contributes 6.1% of reliability, quality, and low power consumption often attract the total industry sales8. Products in this segment are often consumer to pay higher premium for the products. customized to meet the specific need for certain areas and the government project. Industrial and government segment has  Technologies: Products performance often result from the excited decade-long for semiconductor industry. We expect the technology innovation. For this reason, companies often segment’s share to stay around 6% in the next 12 months. invest heavily in the R&D and new technologies. On the other hand, the developments of new technologies are Market shares and Competition highly uncertain and complex, which resulted in the short products life cycle in the industry. The general industry has low market share concertation. However, there is high concertation on specific market shares The following chart shows that the price of semiconductor and and products. In other word, a company cannot dominate the electronic components employs a steady annual decline rate of whole market, but it can be the monopoly in a specific market. 1.2%, with the fact that increasing decline within past five years For instance, Intel occupies 30% of the market shares in the (1.4% annual decline rate). We expect a shaper decline rate in CPU and desktop and PC computing industry, while it occupies the next 5 five years. 13.7% of the industry overall market share.

The following chart depicts Samsung Group has approximately 15% of the total industry market share. The industry is showing an increasing trend of high concertation on specific segment as large cooperation acquire small companies. Meanwhile, the graph also shows that there still is a large number of small companies in the industry are focusing on serving the niche market, including NVidia (GPU), and AMD (Integrated Circuits). We expect that the major players in the industry continue to expend their market shares through merger and acquisition, while the companies dominate the niche market will continue to revolve and set the industry standard for the market.

Figure 11 (IBISWorld Semiconductor price index)

High barriers to enter the market and this trend are increasing. Companies in the industry require the access to the skilled employees, particularly the researchers and developers of new technologies. In some segments, only companies that dominate the market have the access to production facilities and human capitals.

In the size of the market shares, new companies will rely on heavy-marketing in order to gain the market shares form their rivals. At the same time, new companies will experience high

Figure 10 (Source: Bloomberg Semiconductor industry) costs in the production due to low production volume. Also,

Page | 5 from the perspective of customer relationship, it will be 2017 US semiconductor gross profit margin (%) extremely difficult for new companies to have contracts while consumers already had decade-long relationships with their rivals. Thus, new entries need an adequate amount of financial support in order to enter the market.

High globalization in the industry and the trend are increasing. In order to reduce the costs of production, companies in the industry often outsource their production to foreign counties with much lower cost (e.g. China). Therefore, companies have large amount of operations and subsidiaries overseas.

Peer comparison

Net income: Figure 12 shows that the average annual net Figure 13 (Source: Ycharts U.S. semiconductor) income for companies in the U.S. semiconductor industry is approximately $7 billion, indicates that this is an extremely Debt-to-Equity ratio: The following chart shows five historical 9 profitable industry . Intel, the biggest player in the CPU market, Debt-to-Equity ratio in the semiconductor industry. The industry has been running the industry revenue for the past five years. had high average debt-of-equity ratio of 0.7 from 2014 to 2017, Companies serve niche market including NVidia has experience suggesting companies often use debt to finance their projects the rapid increase due to the technology change and product which carried high risks. However, the recent data depicts the innovation, but still generate much less income than the market overall decreased risk for the industry. AMD has the highest leader. debt-to-equity ratio on average in the industry over the past five years, suggesting AMD carries on average higher risks than 2017 US semiconductor net income ($, billion) other companies in the industry9.

2017 US semiconductor Debt-to-Equity

Figure 12 (Source: Ycharts U.S. semiconductor)

Gross profit margin: The following chart shows five historical gross profit margin in the semiconductor industry. The industry Figure 14 (Source: Ycharts U.S. semiconductor) has the average gross profit margin of 44% in the past five years, which is much higher than that of traditional manufacturing industry. Texas Instruments Inc. has the highest gross profit P/E Ratio: The following chart shows five historical P/E Ratio margin in the industry, 2.5% more than the next leading player in the semiconductor industry. The chart depicts the industry has Intel9. average P/E ratio of 14x, suggesting people often carry high expectation for companies in the industry. AMD has the highest P/E ratio in the industry of 120x on average in past five years, messaging the over value of the company9.

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2017 US semiconductor P/E Ratio powered system and data processing server. Amazon, Microsoft, Sony are major customers of AMD’s semicustom segments.

As of December 31, 2017, AMD held $3,540 million in asset with total stockholder’s equity of $611 million. As of November 8, 2018, AMD had a market capitalization of approximately $21.2 billion1.

Third-party fabrication strategy results in low capital expenditure. Unlike its rival, Intel, who maintain the production in the house and control the quality of the product and the profit margin, AMD cooperates with third parties, known as “Global Foundries”, and is outsourcing the manufacturing process. The strategy that AMD lowers its cost on the chip manufacturing and Figure 15 (Source: Ycharts U.S. semiconductor) much lower capital expenditure compare to Intel could mislead investors to believe that AMD is a low-risk company. With the strategy, which gives AMD advantages on lowering its capital Conclusion expenditure, AMD faces the disadvantages of relying on external The industry has companies for technical improvements in manufacturing.  Average annual growth of 1.7%, net  $52.6 billion revenue, net in 2017 Revenue Decomposition  $2.7 billion profit, net in 2017  Short product life span Product segments  High R&D expenditures AMD reports its revenue based on its product segments: 1)  High globalization and barriers Computing and Graphics, 2) Enterprise, Embedded and Semi-  High concertation on specific segment Custom segments. The chart below (Figure 16) shows each business segment’s share of 2017 revenue. In aggregate, AMD’s We expect the industry to continue grow and expend, and have: had a $1.8 billion increase in its total revenue compared to 2016.  Average annual growth of 2.2%, net  Higher competition in price  Continuing of the production outsourcing  Higher R&D expenditures  Companies in niche market grow  Shorter product life line

Company Analysis

Company Overview

Figure 16 (Source: AMD 2017 10-K and enclosed model) Advanced Micro Devices, Inc. (AMD) is a multinational semiconductor company founded on May 1, 1969, and  Computing and Graphics headquartered in Santa Clara, California. AMD manufactures In 2017, computing and graphics provided 57% of total microprocessors, the essential processing unit for the modern revenue on the $3,029 million in sales5. The Central computers and servers. AMD operates through the Computing Processing Unit (CPU) for personal computers is the and Graphics, and Enterprise, Embedded and Semi-Custom major part to AMD’s computing and graphics segments10. segments. Figure 17 indicates that the sales percentage

growth in computing and graphics. AMD’s new CPU  Computing and Graphics: AMD produces Ryzen series, launched in May 201711, contributed 54% microprocessors that are specially used for information sales growth in this segment. We believe that the processing on the personal computers (CPU) and data computing and graphics will remain as the major processing for the graphics displays (GPU). Dell and revenue contributor in the future and stays strong as the Toshiba are major customers of AMD’s CUP and GPU. personal computing device demands more processing

power due to the emerging technology, such as digital  Enterprise Embedded and Semi-Custom segments: mining, Artificial Intelligence, and machine learning. AMD also manufactures System-On-Chip (SOC), customized microprocessors, and server chips, which is the major computing unit for game consoles, enterprise

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Figure 17: (Source: AMD 2017 10-K and enclosed model)

 Enterprise, Embedded and Semi-Custom In 2017, Enterprise, Embedded and Semi-Custom Figure 19 (Source: FactSet ADM Region Revenue) contributed 43% of total revenue of $2,300 million in 5 sales . The Enterprise Embedded and Semi-Custom Growth Analysis consists of Servers, Workstation CPUs, and Gaming

consoles chips. As shown in Figure 4, this segment had AMD has the following room to grow: increased 5% in sales amount in one year from 2015 to  Product innovation 2016. However, AMD’s Semi-Custom chips, such as Gaming consoles chips, are highly relied on Sony and  Gross margin Microsoft’s orders. AMD had the risk of losing major profit in this segment if one of its major customers The first and the most important fundamental factors for AMD leave in the future. On the other hand, AMD’s server to grow is the updates of its new products: 7nm CPU. The CPU (EPYC series) successfully attracted Amazon as improved version AMD’s new CPU equipped with more its major customer12. We estimated that the growth of computing power will be powerful enough to challenge Intel’s sales in Enterprise, Embedded and Semi-Custom dominant position in the CPU market. The second factor that segment will increase and finally exceed the computing drives AMD’s growth is the improved margin. Historically, and graphics in the future. AMD had a gross margin less than 30%, compare to Intel’s 61.87% in gross margin and NVidia’s 62.41%. There is a runway for AMD to grow its revenue as its improved margin due to the potential large production volume for new products.

Revenue Decomposition In November 6, 2018, AMD provided the first public demonstration of the new generation server CPU: 7nm EPYC server processor and Zen 2 processor core13. The new products showed the significant improvement over AMD’s existing products and the similar products from Intel, which might directly help AMD gain market shares from Intel and increase its revenue stream in the United States. According to AMD’s production plan, the new generation server CPU (7nm CPU) will be ready and ship to customer in 201913. Figure 18 (Source: AMD 2017 10-K and enclosed model) We believe that the following characteristics of AMD’s new Region segments products will help the company compete with Intel and generate AMD generates its revenue from three major markets: more than 20% sales’ growth in the Enterprise, Embedded and Asian/Pacific, American, and Europe. It appears that Semi-Custom segment. Asia/Pacific region contributes the most sales to AMD’s total revenue with $4.3 billion in 2017. The following graph shows  Outperforming the Intel’s products. AMD’s EPYC that, in 2017, AMD has 67.6% of total revenue from processors demo outrun the industry standard, Intel’s Xeon Asia/Pacific area, mainly from China and Japan, only 26.6% of series, with higher computing power and more total revenue was generated from the U.S. market. Meanwhile, compatibilities. sales had increased approximately 4% in the U.S. market while  Double performance. The new product allows computers 5% of sales declined in Asia/Pacific region from 2016 to 2017. to compute two times faster than existing products on the We expect that the sales continue to increase in the US market market through its improved algorithm and architecture. while the sales from Asia/Pacific still remain the main revenue stream for AMD.

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 First high-performance x86 7nm CPU. AMD’s new server CPU, featured the accelerated image recognition and other deep learning algorithms, allows its customers to experience world’s first high-performance x86 7nm CPU.

 Multiple 7nm-based products in development. With the development and demonstration of the AMD new products, more advanced products are in development building on the prototype.

We forecast AMD’s total net revenue to grow at an average annual rate of 4% from 2018 to 2027. This forecast is based on AMD’s historical data and the industry trend, as well as AMD’s success of launching its new products in 2019. The following chart depicts historical and forecast total net revenue (in millions). Figure 21 (Source: AMD 2017 10-K and enclosed model)

Potential Risks

Although AMD has the potential run in its new products and gross margin, we still think there exists extreme high risk for AMD to fail the growth due to the following reasons:

 Size is not everything: Even though AMD has been highlighting the high computing power and efficiency of their 7nm server chips, which overrun Intel’s 10nm microprocessors, we do not have enough evidence about AMD’s 7nm to conclude that its absolute advantages will outperform those of Intel’s 10nm at this point. Furthermore, Intel’s 10nm will be more efficient and reliable than AMD’s Figure 20 (Source: AMD 2017 10-K and enclosed model) 7nm14.

Gross margin  IBM is in 5nm game. While AMD and TSMC (Taiwan In 2017, AMD broke its gross margin limit of 30% in past three Semiconductor Manufacturing Company) are embracing the years and reached to the highest point of 34.21%. AMD’s excitement from the 7nm chips, in June 2017, IBM average growth rate in the gross margin from 2015 to 2017 was announced the world first 5nm chip15. More importantly, 6%, although due to inconsistent performance the five-year IBM cooperated with Samsung and Global Foundries in the average rate is 0.2%. We forecast that AMD’s gross margin will development of 5nm chips. grow from 35.56% in 2018 to 46.55% in 2026 based on AMD’s successful sales in personal central processing unit Ryzen series AMD faces a high risk if Samsung or IBM innovate their and Amazon’s contract with AMD of using EPYC chips in AWS Server Chips based on 5nm technology and introduce the cloud, which will increase AMD production volume; hence, more powerful products to cursh AMD’s 7nm server CPU reduce AMD’s accumulated production cost. Our gross margin and PC GPU. in the forecasted period from 2018 to 2026 grow at a more stable long-term rate of 3%. The following chart (Figure 21) shows  No perpetual advantage for AMD. Even AMD AMD’s historical and forecasted gross margin based on our successfully launches its 7nm product and gains large model. portion of market share from Intel, the fundamental characteristics of the semiconductor industry, rapid AMD’s ability to grow gross margin is directly related to its technology change and production innovation, will put ability to generate more sales and gain more market shares from AMD in the high risk for losing its market shares to the Intel. However, our forecast was only based on the AMD’s rivals (e.g. Samsung), especially under the fact that historical performance and industry trend. Even after years of Samsung and Intel have more capital expenditures in R&D constant growth in the gross margin, AMD’s gross margin will than AMD has. We do not expect AMD to have perpetual reach 51.94%, 11% less than its competitor, Intel. advantage in the industry even after 7nm’s success.

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 Enterprise, Embedded & Semi-Custom The Enterprise, Embedded & Semi-Custom severed Valuation Discussion approximately 43% of AMD’s total revenue in 2017. We expect After analyses of the macro economy, the semiconductor a strong increasing of sales (24%) in this segment in 2018, due industry, and AMD’s business, we have arrived a SELL rating to AMD’s launch of 7nm server chip and the fact that Amazon for Advanced Micro Devices, Inc. (Ticker: AMD). By using has already equipped AMD’s chip in their server. However, we multiple valuation models, we have achieved a result of the believe Intel’s10 nm server chips are still compatible to AMD’s target price of $12.95 – $17.35. To calculate the intrinsic value 7nm, and the fact that other major players will push the same for AMD, we implemented the Discounted Cash Flow Model product after seeing AMD’s success in 7nm. Hence, we forecast (DCF), the Economic Profit Model (EP), and P/E relative a decreasing trend of growth in AMD’s sale under this segment. valuation. We believe our DCF and EP models most accurately For year 2019, 2020, 2021, 2022, 2023, 2024, 2025, 2026, 2027, and reasonably reflect the intrinsic value of one share of AMD. we have forecasted 18.00%, 14.00%, 12.00%, 10.00%, 9.00%, The DDM and relative valuation is less appropriate because 8.00%, 8.00%, 8.00% and 7.00% comprehensive sales growth, AMD does not pay dividends to the shareholders. respectively. After 2027, we estimated the constant growth of 4% in the Enterprise, Embedded & Semi-Custom segment. Key Assumptions Cost of Sales Our cost of sales assumption in our first year (2018) is based on Revenue Decomposition 5-years average as a percentage of net revenues. In 2018, we AMD has two major product segments: Computing & Graphics have received management guide on anticipated decline on cost segment, and the Enterprise, Embedded & Semi-Custom as the production volume goes up. We anticipate that the cost of segment. In 2017, AMD had 53.99% sales growth in Computing sales decreasing at a similar rate through the entirety of the & Graphic, and a 0.22% decline in Enterprise, Embedded & forecasted periods as we expect the economies of scale Semi-Custom, which indicated that the total of 24.74% sales continuing to develop for AMD. growth come from external customers. The following graph (Figure 22) shows our forecasted sales growth (%) from 2018 to Research and Development Expenditures 2026. Over the last 5 years, AMD’s investment in R&D showed a steady percentage of net revenues. We believe that the same pattern will continue to exit through our forecasted periods. Hence, we expect the Research and Development Expenditures will maintain at 20% of the net revenues.

Depreciation expense Since AMD outsources its production to the third party, we expect a slow increase in AMD’s capital investment; hence, we think there will be a decreasing trend for the depreciation expenses during our forecast period.

Marketing, general and administrative Over the last 5 years, AMD’s expense in marketing, general and administrative expense has shown a steady percentage of net Figure 22 (Source: AMD 2017 10-K and enclosed mode) revenues. We believe the same pattern will continue to exit through our forecasted periods. Therefore, we expect marketing,  Computing & Graphics: general and administrative development expenditures will The computing and Graphics segment has been providing the maintain at 10% of the net revenues. major revenue stream for the company. We forecast this segment continuing to expand in the coming years as AMD main source Weighted Average Cost of Capital (WACC) of revenue. Through the significant calculation and analysis, we found AMD have a WACC of 12.246%, based on their capital structure of AMD had launched its Ryzen generation CPU in April 2018, 91.51% equity and 8.49% debt. We recognized AMD’s WACC and we expect 15% of the sales growth in computing & graphics is ranked at end for companies in the industry. However, we are in 2018 and 12% in 2019. On the hand, we believe the PC confident that the discount rate is appreciate for AMD market is slowly turning mature. Hence, for year 2020, 2021, considering its past and future plan of ESOP. We do not 2022, 2023, 2024, 2025, 2026, 2027, we have forecasted anticipate the capital structure or WACC changing significantly 10.00%, 9.00%, 9.00%, 8.00%, 8.00%, 8.00%, 7.00%, and in the long-term. 7.00% comprehensive sales growth, respectively. After 2027, we estimated the constant growth of 4% in the computing & Cost of Equity graphics industry as the industry average. To calculate AMD’s cost of equity, we utilized the Capital Assets Pricing model (CAPM). In order to calculate the ratio, we used the risk-free rate, the market risk premium, and AMD’s specific beta. We used 3.08% risk-free rate, which is the current

Page | 10 yield on 10-year U.S. Treasury. We also used 4.99% as the Under both models, we have calculated an intrinsic value of market risk premium, which is forecasted by Aswath $14.99 for one share of AMD. We are confident that our price Damodaran16. AMD’s beta was calculated by Bloomberg accurately represent the value of AMD at the present day; terminal and was averaged from the raw monthly, weekly, therefore, focus should remain primarily on our DCF and EP annual betas for the past 5 to 10 years. This produced a beta of models. 1.98. We believe that the beta is reasonable for AMD since the industry is very volatile due to rapid technology change. Overall, Dividend Discount Model under the CAPM method, AMD’s cost of equity was estimated AMD does not currently pay any dividend to shareholders, and is 12.246%. the company will not pay the dividend in the foreseeable future. Therefore, we do not believe our DDM model carries less when Cost of Debt evaluating our analysis. In order to find our value under this Based on AMD’s reporting on 2017’s 10-K, the market value for model, we applied CV P/E multiple which yields the inartistic AMD’s debt is $1,700 million. We added the present value of value of $10.93 per share. To emphasize the point, we believe AMD’s operating lease, which is $201 million. Therefore, the DDM does not offer us an accurate representation of the value of total market value for AMD’s debt is $1,901 million. We used a AMD. pretax cost of debt of 5.67%, which was calculated by the Bloomberg terminal and then added the average return rate of Relative P/E Valuation company’s 10 year corporate bond. After applying the marginal Our relative valuation model values six companies that are in the tax rate of 21.00%. We found that the after-tax cost is 4.55%. same industry as AMD. The six companies are Micron Technology, Inc. (Ticker: MU), NXP Semiconductors N.V. WACC Weights (Ticker: NXPI), QUALCOMM Incorporated (Ticker: QCOM), AMD’s market value of equity was calculated by taking current Intel Corporation (Ticker: INTC), Applied Materials, Inc. share price, which is $21.03 per share, multiplied by current (Ticker: AMAT), and Taiwan Semiconductor Manufacturing shares outstanding $974.87 million shares outstanding), which Company Limited (Ticker: TSM), respectively. come up with a total MVE of $20,501.52 million. The market value of debt (MVD) is equal to $1,901 million, as we calculated The model yields the average P/E values of $2.38 and $3.91 per in the previous part. These numbers give us a weight of equity share for year 2018 and 2019, respectively. We do not believe and a weight of debt equal to 91.51% and 9.49%, respectively. the model gives a represent value for AMD whatsoever. One In total, AMD ends up with a WACC of approximately of reason is that only 23% of AMD’s total revenue is generated in 12.246%. the U.S., while other net incomes and reported under AMD’s joint ventures overseas and remain the cash outside the United States. This strategy also helps avoid high taxes from the U.S. Sensitivity Analysis government. In the addition, customers will pay more premiums due to Intel’s marketing strategy. Last but not least, it should be

noticed that the semiconductor industry has more volatilities Valuation Models than other industries. AMD’s launch on 7nm will be the potential game changer for the market. For those reasons, AMD We believe that the DCF and EP models can best reflect our should trade higher than the price from relative P/E valuation. current perspective on AMD’s long term sustainability and adjust stock price of $14.99. The Discounted Cash Flow (DCF) We performed the sensitivity test in order to provide clarity on is utilized by forecasting AMD’s cash flow and discounting how AMD’s stock price can change when giving changes in them to the present value using our calculated WACC. Each main assumptions held in the model. Those assumptions present year’s end free cash flow are calculated by subtracting that the changes in AMD’s margin, growth, and the revenue stream. year’s capital expenditures from the current year’s net operating profit less adjusted taxes (NOPLAT). A continuing value Risk-Free Rate vs. Market Risk formula is applied to the CV year to determine the present value The risk-free rate and market risk are important factors used to of company’s cash flow in perpetuity. The EP model is built to calculate AMD’s WACC, which can have significant impact on calculate the difference between each year’s return on invested the company’s stock price. The increase in risk-free rate alone capital (ROIC) and WACC, and multiplies the current year’s can cause a $0.32 - $2.61 decline in the per share price, which beginning invested Capital (Beg. IC) to arrive the amount of the indicates the significant effects the risk-free rate will bring to current year’s EP. Contusing value formula is used to calculate AMD’s stock in the near future. The increase in market risk the present value of company’s EP in propensity. premium can have much serious impact on AMD’s stock, which causes a $2.5 – $ 9.35 decline in the share price. In both the Discounted Cash Flow and the Economic Profit model, we have forecasted AMD’s cash flow to the year of COGS vs. R&D expenditure 2027, for which we applied our CV growth rate of NOPLAT of AMD’s most significant operating expense is the cost of goods 4.00%. This will be the rate that we anticipate AMD to grow sold (COGS), which makes up close to 62% of the sales each their revenue at each year until reaching a steady-state of growth year, on the historical average. In our forecasted period, we that close to real GDP growth. believe that there will be a decrease in AMD’s COGS due to the increase in its production volume. The model shows the stock price can climb out 13% higher corresponding to 2% decrease in

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COGS. Change R&D alone will cause 20% fluctuation of almost $4.5 under the same COGS.

WACC vs. CV Growth Under the same CV growth, decreasing in WACC will cause a steady increase of the stock price in approximately $2.00 per 0.5%, while the CV growth has less impact for the price. The increasing in CV growth alone will only contribute approximately $0.42 increase, corresponding to a CV growth increase of 0.25%.

CV Growth vs. COGS As the most important factor for AMD’s value, COGS directly influences the company net income, while CV growth determines the company’s terminal value. The tests show that COGS has less influence on the company’s price than CV growth. The 1% increase in CV growth alone could trigger approximately 10% increase in the stock price, while 1% decrease in COGS alone can only generates approximately $0.62 increase in the price.

Beta vs. R&D Expenditure The test indicates that AMD’s stock price has a high correlation with the company’s beta. The 0.11% increase in Beta alone will cause approximately $1.6 increase in stock price. However, the stock price will fluctuate less than 0.05% under the decreasing of 1% R&D margin.

Risk-free rate vs. CV Growth AMD’s debt weighted 8.49% in its capital structure, there’s no doubt that risk-free rate will have more impact on AMD than CV growth will have. The test suggests the same result. Along with the increase in risk-free rate will cause the price to increase $1 - $3 per share, while the change in CV growth will only cause the stock decrease less than $2.

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References

1 Advanced Micro Devices Inc. (n.d.). Retrieved from s-7nm-zen-2-will-worry-intel-by-doubling-cpu-core- https://www.bloomberg.com/quote/AMD:US counts/#62f506ce4e43 2 United States GDP Growth Rate 1947-2018 | Data | Chart | 14 About Intel’s 10nm Process Lead. Retrieved from Calendar. (n.d.). Retrieved from https://wccftech.com/analysis-about-intels-10nm-process/ https://tradingeconomics.com/united-states/gdp-growth 15 IBM unveils world’s first 5nm chip. Retrieved from 3 FactSet Research Systems. (n.d.). ADVANCED MICRO https://arstechnica.com/gadgets/2017/06/ibm-5nm- DEVICES, INC: Snapshots. Retrieved from FactSet database chip/?comments=1 https://company-security.apps.factset.com/snapshot/AMD- 16 Damodaran Online. (n.d.). Retrieved from US http://pages.stern.nyu.edu/~adamodar/ 4 The Industry Handbook: The Semiconductor Industry. (2017, March 30). Retrieved from Important Disclaimer https://www.investopedia.com/features/industryhandbook/se miconductor.asp 5 This report was created by students enrolled in the Security FactSet Research Systems. (n.d.). United States Analysis (6F:112) class at the University of Iowa. The report Semiconductor Industry: Snapshots. Retrieved from FactSet was originally created to offer an internal investment database recommendation for the University of Iowa Krause Fund and https://industry.apps.factset.com/snapshot/FI1305US 6 its advisory board. The report also provides potential Semiconductor Research Policy | SIA. (n.d.). Retrieved employers and other interested parties an example of the from https://www.semiconductors.org/policies/research/ 7 students’ skills, knowledge and abilities. Members of the Impact of the Semiconductor Industry. (n.d.). Retrieved Krause Fund are not registered investment advisors, brokers from https://www.semiconductors.org/semiconductors- or officially licensed financial professionals. The investment 101/industry-impact/ 8 advice contained in this report does not represent an offer or Global Semiconductor & Electronic Parts Manufacturing solicitation to buy or sell any of the securities mentioned. Reports. (2018). Retrieved from Unless otherwise noted, facts and figures included in this https://clients1.ibisworld.com/reports/gl/industry/productsan report are from publicly available sources. This report is not a dmarkets.aspx?entid=960 9 complete compilation of data, and its accuracy is not Worldwide Semiconductor Sales Chart. (n.d.). Retrieved guaranteed. From time to time, the University of Iowa, its from faculty, staff, students, or the Krause Fund may hold a https://ycharts.com/indicators/semiconductor_billings/chart/# financial interest in the companies mentioned in this report. /?securities=id:I:WSS,include:true,,&calcs=&correlations=& zoom=5&startDate=&endDate=&format=real&recessions=fa lse&chartView=&chartType=interactive&splitType=single& scaleType=linear&securitylistName=&securitylistSecurityId =&securityGroup=&displayTicker=false&title=¬e=&unit s=false&source=false&liveData=false"eLegend=true&l egendOnChart=true&partner=basic_850&useEstimates=false 10 Advanced Micro Devices Inc. (n.d.). Retrieved from https://www.bloomberg.com/quote/AMD:US 11 Zettler, B. (2017, March 6). AMD: The Ryzen Good News Overwhelms The Bad News. Retrieved from https://seekingalpha.com/article/4052519-amd-ryzen-good- news-overwhelms-bad-news 12 Witkowski, W. (2018, November 06). AMD stock jumps as Amazon starts using Epyc chips in the cloud. Retrieved from https://www.marketwatch.com/story/amd-stock-jumps- as-amazon-starts-using-epyc-chips-in-the-cloud-2018-11- 06?mod=hp_minor_pos19 13 Leather, A. (2018, November 07). AMD's 7nm Zen 2 Will Worry Intel By Doubling CPU Core Counts. Retrieved from https://www.forbes.com/sites/antonyleather/2018/11/06/amd

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Advanced Micro Devices, Inc. Revenue Decomposition In Millions Fiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV Net revenue: Computing and Graphics 1,805.00 1,967.00 3,029.00 3,483.35 3,910.06 4,319.15 4,720.86 5,124.27 5,537.01 5,965.32 6,414.39 6,888.62 7,391.88 Enterprise, Embedded and Semi- 2,186.00 2,305.00 2,300.00 2,852.00 3,368.21 3,848.69 4,301.76 4,738.48 5,169.62 5,604.60 6,051.25 6,515.98 7,004.16 Custom Other ------Total net revenue 3,991.00 4,272.00 5,329.00 6,335.35 7,278.27 8,167.84 9,022.62 9,862.75 10,706.63 11,569.93 12,465.64 13,404.61 14,396.04

Sales by geographic regions United States 984.00 923.00 1,364.00 Europe 168.00 155.00 263.00 China (including Taiwan) 1,145.00 1,108.00 1,747.00 Singapore 356.00 571.00 551.00 Japan 1,254.00 1,443.00 1,242.00 Other countries 84.00 72.00 162.00 Total sales to external customers 3,991.00 4,272.00 5,329.00

Sales % Growth by Geographic Regions United States -4.47% -6.20% 47.78% Europe -48.31% -7.74% 69.68% China (including Taiwan) -50.73% -3.23% 57.67% Singapore -4.04% 60.39% -3.50% Japan -5.29% 15.07% -13.93% Other countries -36.36% -14.29% 125.00% Total sales to external customers -27.52% 7.04% 24.74%

Sales by Segments Computing & Graphics 1,805.00 1,967.00 3,029.00 3,483.35 3,910.06 4,319.15 4,720.86 5,124.27 5,537.01 5,965.32 6,414.39 6,888.62 7,391.88 Enterprise, Embedded & Semi- 2,186.00 2,305.00 2,300.00 2,852.00 3,368.21 3,848.69 4,301.76 4,738.48 5,169.62 5,604.60 6,051.25 6,515.98 7,004.16 Custom Historical Segments - - - Total sales to external customers 3,991.00 4,272.00 5,329.00 6,335.35 7,278.27 8,167.84 9,022.62 9,862.75 10,706.63 11,569.93 12,465.64 13,404.61 14,396.04

Sales % Growth by Segments Computing & Graphics -42.37% 8.98% 53.99% 15% 12% 10% 9% 9% 8% 8% 8% 7% 7% Enterprise, Embedded & Semi- Custom -7.92% 5.44% -0.22% 24% 18% 14% 12% 10% 9% 8% 8% 8% 7% Historical Segments - - - Total sales to external customers -27.52% 7.04% 24.74% 18.88% 14.88% 12.22% 10.47% 9.31% 8.56% 8.06% 7.74% 7.53% 7.40%

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Advanced Micro Devices, Inc. Income Statement In Millions Fiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV Net revenue 3,991.00 4,272.00 5,329.00 6,335.35 7,278.27 8,167.84 9,022.62 9,862.75 10,706.63 11,569.93 12,465.64 13,404.61 14,396.04 Cost of sales 2,817.00 3,203.00 3,429.00 3,927.92 4,377.15 4,764.77 5,105.52 5,413.48 5,700.37 5,975.20 6,244.66 6,513.58 6,785.48 Depreciation expense 94.00 71.00 77.00 91.35 99.84 106.28 111.43 115.74 119.55 123.04 126.35 129.57 132.75 Gross margin 1,080.00 998.00 1,823.00 2,316.08 2,801.28 3,296.78 3,805.68 4,333.53 4,886.71 5,471.69 6,094.64 6,761.46 7,477.81

Research and development 947.00 1,008.00 1,160.00 1,267.07 1,455.65 1,633.57 1,804.52 1,972.55 2,141.33 2,313.99 2,493.13 2,680.92 2,879.21 Marketing, general and administrative 482.00 460.00 511.00 633.54 727.83 816.78 902.26 986.28 1,070.66 1,156.99 1,246.56 1,340.46 1,439.60 Amortization of acquired intangible assets 3.00 ------Restructuring and other special charges, net 129.00 (10.00) ------Goodwill impairment charge ------Legal settlements, net ------Licensing gain - (88.00) (52.00) ------Operating income (loss) (481.00) (372.00) 204.00 415.48 617.80 846.43 1,098.89 1,374.70 1,674.72 2,000.71 2,354.95 2,740.08 3,159.00

Interest expense (160.00) (156.00) (126.00) (168.71) (170.58) (207.50) (228.76) (250.19) (298.93) (305.57) (346.48) (355.45) (379.67) Other income (expense), net (5.00) 80.00 (9.00) (6.00) (6.00) (6.00) (6.00) (6.00) (6.00) (6.00) (6.00) (6.00) (6.00) Income (loss) before equity loss and income taxes (646.00) (448.00) 69.00 240.77 441.22 632.93 864.14 1,118.51 1,369.79 1,689.14 2,002.47 2,378.63 2,773.33

Provision for income taxes 14.00 39.00 19.00 24.08 35.30 50.63 86.41 123.04 136.98 202.70 220.27 261.65 332.80 Equity loss in investee - (10.00) (7.00) ------Net income (loss) (660.00) (497.00) 43.00 216.69 405.92 582.30 777.72 995.48 1,232.81 1,486.44 1,782.20 2,116.98 2,440.53

Earnings (loss) per share Basic (0.84) (0.60) 0.04 0.22 0.39 0.53 0.71 0.91 1.13 1.36 1.63 1.94 2.23 Shares used in per share calculation Basic 783 835 952 1000 1047 1095 1095 1095 1094 1094 1093 1093 1093

Dividends per share ------

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Advanced Micro Devices, Inc. Balance Sheet In Miilions Fiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV Assets Current Assets Cash & cash equivalents 785.00 1,264.00 1,185.00 1,211.99 2,000.49 2,787.91 3,503.87 4,970.57 5,921.58 7,700.33 9,345.18 11,456.27 13,948.29 Marketable securities ------Accounts receivable, net 533.00 311.00 400.00 506.83 600.46 694.27 789.48 887.65 1,070.66 1,185.92 1,277.73 1,407.48 1,511.58 Inventories, net 678.00 751.00 739.00 886.95 1,029.88 1,163.92 1,353.39 1,504.07 1,579.23 1,735.49 1,838.68 1,990.58 2,195.40 Prepayments & other receivables 33.00 32.00 33.00 39.28 50.95 59.22 67.67 75.94 85.65 94.87 99.73 101.88 118.05 Prepaid expenses & other current assets 43.00 63.00 77.00 89.96 102.62 114.35 125.41 136.11 146.68 159.66 169.53 183.64 200.10 Other current assets 248.00 109.00 188.00 228.07 247.46 275.26 297.75 320.54 343.68 369.08 398.90 435.65 460.67 Total current assets 2,320.00 2,530.00 2,622.00 2,963.08 4,031.86 5,094.92 6,137.57 7,894.88 9,147.49 11,245.36 13,129.75 15,575.50 18,434.10 Long-term marketable securities ------Property, plant & equipment, net 188.00 164.00 261.00 285.25 303.67 318.36 330.70 341.56 351.53 360.99 370.19 379.29 388.39 Acquisition related intangible assets, net ------Goodwill 278.00 289.00 289.00 289.00 289.00 289.00 289.00 289.00 289.00 289.00 289.00 289.00 289.00 Investments - 59.00 58.00 59.79 61.63 63.53 65.48 67.50 69.58 71.72 73.93 76.21 78.55 Other assets 298.00 279.00 310.00 342.74 451.25 473.73 554.89 611.49 679.87 752.05 779.10 844.49 928.54 Total assets 3,084.00 3,321.00 3,540.00 3,939.86 5,137.41 6,239.54 7,377.64 9,204.43 10,537.47 12,719.12 14,641.97 17,164.49 20,118.59

Liabilities and Stockholders' Equity Current Liabilities Short-term debt 230.00 - 70.00 - 166.00 - - 347.00 - 311.00 - - - Accounts payable 524.00 823.00 796.00 921.79 1,073.55 1,233.34 1,339.86 1,479.41 1,616.70 1,700.78 1,844.91 1,997.29 2,173.80 Accrued & other liabilities 472.00 391.00 541.00 649.37 738.74 824.95 902.26 996.14 1,086.72 1,180.13 1,277.73 1,360.57 1,468.40 Other current liabilities 124.00 69.00 57.00 63.35 69.14 85.76 99.25 113.42 128.48 134.21 132.14 146.11 158.36 Deferred income on shipments to distributors 53.00 63.00 22.00 31.68 54.59 102.10 103.76 123.28 144.54 150.41 155.82 174.26 179.95 Total current liabilities 1,403.00 1,346.00 1,486.00 1,666.20 2,102.02 2,246.16 2,445.13 3,059.26 2,976.44 3,476.53 3,410.60 3,678.22 3,980.51

Long-term debt 2,007.00 1,435.00 1,325.00 1,177.50 1,363.93 1,568.46 1,725.81 1,936.89 2,116.93 2,307.94 2,509.39 2,648.40 2,854.11 Other long-term liabilities 86.00 124.00 118.00 117.75 136.39 156.85 172.58 193.69 211.69 230.79 250.94 264.84 285.41 Total liabilities 3,496.00 2,905.00 2,929.00 2,961.45 3,602.35 3,971.46 4,343.53 5,189.83 5,305.06 6,015.27 6,170.93 6,591.46 7,120.03

Stockholders' Equity Common stock and Additional paid-in capital 7,025.00 8,343.00 8,473.00 8,638.72 8,804.45 8,970.17 8,973.48 8,973.48 8,973.48 8,973.48 8,973.48 8,973.48 8,973.48 Treasury stock, at cost (123.00) (119.00) (108.00) (123.00) (138.00) (153.00) (168.00) (183.00) (198.00) (213.00) (228.00) (243.00) (258.00) Retained earnings (accumulated deficit) (7,306.00) (7,803.00) (7,760.00) (7,543.31) (7,137.39) (6,555.09) (5,777.36) (4,781.89) (3,549.08) (2,062.64) (280.44) 1,836.54 4,277.08 Accumulated other comprehensive income (loss) (8.00) (5.00) 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 Total stockholders' equity (deficit) (412.00) 416.00 611.00 978.41 1,535.06 2,268.08 3,034.12 4,014.59 5,232.41 6,703.85 8,471.04 10,573.03 12,998.56

Total liabilities and stockholders' equity 3,084.00 3,321.00 3,540.00 3,939.86 5,137.41 6,239.54 7,377.64 9,204.43 10,537.47 12,719.12 14,641.97 17,164.49 20,118.59

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Advanced Micro Devices, Inc. Cash Flow Statement In Millions Fiscal Years Ending Dec. 30 2015 2016 2017 Cash flows from operating activities Net income (loss) (660.00) (497.00) 43.00 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Net gain on sale of equity interests in ATMP JV - (146.00) (3.00) Depreciation and amortization 167.00 133.00 144.00 Net loss on disposal of property, plant and equipment - - - Provision for deferred income taxes - 11.00 - Stock-based compensation expense 63.00 86.00 97.00 Goodwill impairment charge - - - Amortization of debt discount and issuance costs 11.00 21.00 36.00 Restructuring and other special charges, net 83.00 - - Net loss on debt redemption - 68.00 12.00 Fair value of warrant issued related to sixth amendment to the WSA - 240.00 - Other (3.00) (6.00) 3.00 Changes in operating assets and liabilities: Accounts receivable 280.00 222.00 (89.00) Inventories (11.00) (73.00) 12.00 Prepayment and other receivables - related parties 84.00 1.00 (1.00) Prepaid expenses and other assets (111.00) (166.00) (140.00) Payable to related parties 27.00 138.00 29.00 Accounts payable, accrued liabilities and other (156.00) 58.00 (75.00) Net cash provided by (used in) operating activities (226.00) 90.00 68.00

Cash flows from investing activities: Net proceeds from sale of equity interests in ATMP JV - 342.00 1.00 Purchases of available-for-sale securities (227.00) - (222.00) Purchases of property, plant and equipment (96.00) (77.00) (113.00) Proceeds from maturities of available-for-sale securities 462.00 - 222.00 Proceeds from sale of property, plant and equipment 8.00 - 0.00 Other - 2.00 (2.00) Net cash provided by (used in) investing activities 147.00 267.00 (114.00)

Cash flows from financing activities: Proceeds from issuance of common stock, net of issuance costs - 667.00 - Proceeds from issuance of convertible senior notes, net of issuance costs - 782.00 - Proceeds from issuance of common stock under stock-based compensation equity plans 5.00 20.00 20.00 Proceeds from (repayments of) short-term borrowings, net 100.00 (230.00) 70.00 Repayments of long-term debt and capital lease obligations (44.00) (1,113.00) (110.00) Other (2.00) (4.00) (13.00) Net cash provided by (used in) financing activities 59.00 122.00 (33.00)

Net increase (decrease) in cash and cash equivalents (20.00) 479.00 (79.00) Cash and cash equivalents at beginning of year 805.00 785.00 1,264.00 Cash and cash equivalents at end of year 785.00 1,264.00 1,185.00

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Advanced Micro Devices, Inc. Cash Flow Statement In Millions Fiscal Years Ending Dec. 30 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV CASH FLOWS FROM OPERATING ACTIVITIES: Net Income 216.69 405.92 582.30 777.72 995.48 1,232.81 1,486.44 1,782.20 2,116.98 2,440.53 Depreciation and amortization 91.35 99.84 106.28 111.43 115.74 119.55 123.04 126.35 129.57 132.75 Change in Accounts receivable (106.83) (93.63) (93.81) (95.21) (98.17) (183.02) (115.25) (91.81) (129.76) (104.10) Change in Inventories (147.95) (142.93) (134.04) (189.48) (150.68) (75.16) (156.26) (103.19) (151.90) (204.81) Change in prepayments & other receivables (6.28) (11.67) (8.27) (8.45) (8.27) (9.71) (9.22) (4.85) (2.15) (16.17) Change in Prepaid expenses and other assets (12.96) (12.66) (11.73) (11.06) (10.69) (10.57) (12.98) (9.87) (14.11) (16.46) Change in other current assets (40.07) (19.39) (27.79) (22.49) (22.79) (23.14) (25.40) (29.82) (36.75) (25.02) Change in Accounts payable 125.79 151.75 159.80 106.52 139.55 137.29 84.08 144.14 152.37 176.52 Change in Accrued & other liabilities 108.37 89.37 86.21 77.31 93.88 90.59 93.41 97.60 82.84 107.83 Change in other current liabilities 6.35 5.79 16.62 13.49 14.17 15.06 5.73 (2.08) 13.97 12.25 Change in Deferred revenues 9.68 22.91 47.51 1.66 19.52 21.26 5.87 5.41 18.44 5.69 Change in other Long-term asset (32.74) (108.51) (22.48) (81.16) (56.60) (68.38) (72.17) (27.06) (65.39) (84.05) Net cash flows from operating activities 211.40 386.80 700.60 680.27 1,031.14 1,246.56 1,407.27 1,887.01 2,114.12 2,424.94

CASH FLOWS FROM INVESTING ACTIVITIES: Change in long term investment (1.79) (1.84) (1.90) (1.96) (2.02) (2.08) (2.14) (2.21) (2.28) (2.35) Capital Expenditures (115.60) (118.26) (120.98) (123.76) (126.61) (129.52) (132.50) (135.55) (138.66) (141.85) Net cash flows from investing activities (117.39) (120.10) (122.88) (125.72) (128.62) (131.60) (134.64) (137.75) (140.94) (144.20)

CASH FLOWS FROM FINANCING ACTIVITIES: Change in Marketable securies ------Proces from payment of notes paybale and S-T debt (70.00) 166.00 (166.00) - 347.00 (347.00) 311.00 (311.00) - - Change in Longterm Debt (147.50) 186.43 204.52 157.36 211.07 180.04 191.02 201.45 139.00 205.71 Change in other longterm Libailities (0.25) 18.64 20.45 15.74 21.11 18.00 19.10 20.14 13.90 20.57 Repurchase of common stock (15.00) (15.00) (15.00) (15.00) (15.00) (15.00) (15.00) (15.00) (15.00) (15.00) ESOP exercise 165.72 165.72 165.72 3.31 ------Changes in accumulated other comprehensive income ------Net cash flows from financing activities (67.03) 521.80 209.70 161.41 564.18 (163.95) 506.12 (104.41) 137.90 211.29

Net increase (decrease) in cash & cash equivalents 26.99 788.50 787.42 715.96 1,466.70 951.01 1,778.75 1,644.85 2,111.09 2,492.03 Cash & cash equivalents, beginning of year 1,185.00 1,211.99 2,000.49 2,787.91 3,503.87 4,970.57 5,921.58 7,700.33 9,345.18 11,456.27 Cash & cash equivalents, end of year 1,211.99 2,000.49 2,787.91 3,503.87 4,970.57 5,921.58 7,700.33 9,345.18 11,456.27 13,948.29

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Advanced Micro Devices, Inc. Common Size Income Statement Percent of Sales Fiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV Net revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of sales 70.58% 74.98% 64.35% 62.00% 60.14% 58.34% 56.59% 54.89% 53.24% 51.64% 50.09% 48.59% 47.13% Depreciation expense 2.36% 1.66% 1.44% 1.44% 1.37% 1.30% 1.23% 1.17% 1.12% 1.06% 1.01% 1.04% 1.06% Gross margin 27.06% 23.36% 34.21% 36.56% 38.49% 40.36% 42.18% 43.94% 45.64% 47.29% 48.89% 54.24% 59.99%

Research and development 23.73% 23.60% 21.77% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% Marketing, general and administrative 12.08% 10.77% 9.59% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Amortization of acquired intangible assets 0.08% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Restructuring and other special charges, net 3.23% -0.23% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Goodwill impairment charge 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Legal settlements, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Licensing gain 0.00% -2.06% -0.98% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Operating income (loss) -12.05% -8.71% 3.83% 6.56% 8.49% 10.36% 12.18% 13.94% 15.64% 17.29% 18.89% 20.44% 21.94%

Interest expense 4.01% 3.65% 2.36% 2.66% 2.34% 2.54% 2.54% 2.54% 2.79% 2.64% 2.78% 2.65% 2.64% Other income (expense), net 0.13% -1.87% 0.17% 0.09% 0.08% 0.07% 0.07% 0.06% 0.06% 0.05% 0.05% 0.04% 0.04% Income (loss) before equity loss and income taxes -16.19% -10.49% 1.29% 3.80% 6.06% 7.75% 9.58% 11.34% 12.79% 14.60% 16.06% 17.74% 19.26%

Provision for income taxes 0.35% 0.91% 0.36% 0.38% 0.48% 0.62% 0.96% 1.25% 1.28% 1.75% 1.77% 1.95% 2.31% Equity loss in investee 0.00% -0.23% -0.13% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Net income (loss) -16.54% -11.63% 0.81% 3.42% 5.58% 7.13% 8.62% 10.09% 11.51% 12.85% 14.30% 15.79% 16.95%

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Advanced Micro Devices, Inc. Common Size Balance Sheet Percent of Sales Fiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV Assets Current Assets Cash & cash equivalents 19.67% 29.59% 22.24% 19.13% 27.49% 34.13% 38.83% 50.40% 55.31% 66.55% 74.97% 85.47% 96.89% Marketable securities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Accounts receivable, net 13.36% 7.28% 7.51% 8.00% 8.25% 8.50% 8.75% 9.00% 10.00% 10.25% 10.25% 10.50% 10.50% Inventories, net 16.99% 17.58% 13.87% 14.00% 14.15% 14.25% 15.00% 15.25% 14.75% 15.00% 14.75% 14.85% 15.25% Prepayments & other receivavbles 0.83% 0.75% 0.62% 0.62% 0.70% 0.73% 0.75% 0.77% 0.80% 0.82% 0.80% 0.76% 0.82% Prepaid expenses & other current assets 1.08% 1.47% 1.44% 1.42% 1.41% 1.40% 1.39% 1.38% 1.37% 1.38% 1.36% 1.37% 1.39% Other current assets 6.21% 2.55% 3.53% 3.60% 3.40% 3.37% 3.30% 3.25% 3.21% 3.19% 3.20% 3.25% 3.20% Total current assets 58.13% 59.22% 49.20% 46.77% 55.40% 62.38% 68.02% 80.05% 85.44% 97.19% 105.33% 116.20% 128.05% Long-term marketable securities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Property, plant & equipment, net 4.71% 3.84% 4.90% 5.10% 3.20% 5.60% 4.16% 5.21% 5.50% 4.84% 4.12% 4.62% 5.12% Acquisition related intangible assets, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Goodwill 6.97% 6.76% 5.42% 4.41% 3.93% 3.38% 2.92% 2.52% 2.22% 1.96% 1.69% 1.72% 2.69% Investments 0.00% 1.38% 1.09% 0.91% 0.84% 0.74% 0.66% 0.59% 0.54% 0.49% 0.43% 0.63% 0.76% Other assets 7.47% 6.53% 5.82% 5.41% 6.20% 5.80% 6.15% 6.20% 6.35% 6.50% 6.25% 6.30% 6.45% Total assets 77.27% 77.74% 66.43% 62.61% 69.57% 77.91% 81.91% 94.56% 100.05% 110.98% 117.83% 129.46% 143.07%

Liabilities and Stockholders' Equity Current Liabilities Short-term debt 5.76% 0.00% 1.31% 1.25% 2.28% 1.30% 5.10% 3.52% 3.40% 2.69% 3.10% 3.21% 1.21% Accounts payable 13.13% 19.26% 14.94% 14.55% 14.75% 15.10% 14.85% 15.00% 15.10% 14.70% 14.80% 14.90% 15.10% Accrued & other liabilities 11.83% 9.15% 10.15% 10.25% 10.15% 10.10% 10.00% 10.10% 10.15% 10.20% 10.25% 10.15% 10.20% Other current liabilities 3.11% 1.62% 1.07% 1.00% 0.95% 1.05% 1.10% 1.15% 1.20% 1.16% 1.06% 1.09% 1.10% Deferred income on shipments to distributors 1.33% 1.47% 0.41% 0.50% 0.75% 1.25% 1.15% 1.25% 1.35% 1.30% 1.25% 1.30% 1.25% Total current liabilities 35.15% 31.51% 27.89% 27.55% 28.88% 28.80% 32.20% 31.02% 31.20% 30.05% 30.46% 30.65% 28.86%

Long-term debt 50.29% 33.59% 24.86% 24.86% 24.86% 24.86% 24.86% 24.86% 24.86% 24.86% 24.86% 24.86% 24.86% Other long-term liabilities 2.15% 2.90% 2.21% 1.62% 2.08% 2.13% 2.13% 2.28% 2.46% 2.35% 2.20% 2.74% 2.00% Total liabilities 87.60% 68.00% 54.96% 54.03% 55.82% 55.79% 59.19% 58.16% 58.52% 57.26% 57.52% 58.25% 55.72%

Stockholders' Equity Common stock 176.02% 195.29% 159.00% 136.36% 120.97% 109.82% 99.46% 90.98% 83.81% 77.56% 71.99% 71.99% 71.99% Treasury stock, at cost -3.08% -2.79% -2.03% -1.94% -1.90% -1.87% -1.86% -1.86% -1.85% -1.84% -1.83% -1.81% -1.79% Retained earnings (accumulated deficit) -183.06% -182.65% -145.62% -119.07% -98.06% -80.25% -64.03% -48.48% -33.15% -17.83% -2.25% 13.70% 29.71% Accumulated other comprehensive income (loss) -0.20% -0.12% 0.11% 0.09% 0.08% 0.07% 0.07% 0.06% 0.06% 0.05% 0.05% 0.04% 0.04% Total stockholders' equity (deficit) -10.32% 9.74% 11.47% 15.44% 21.09% 27.77% 33.63% 40.70% 48.87% 57.94% 67.96% 78.88% 90.29%

Total liabilities and stockholders' equity 77.27% 77.74% 66.43% 69.48% 70.59% 76.39% 81.77% 93.33% 98.42% 109.93% 117.46% 128.05% 139.75%

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Advanced Micro Devices, Inc. Value Driver Estimation In Milions Fiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV NOPLAT Operating Revenue 3,991.00 4,272.00 5,329.00 6,335.35 7,278.27 8,167.84 9,022.62 9,862.75 10,706.63 11,569.93 12,465.64 13,404.61 14,396.04 Cost of Sales 2,911.00 3,274.00 3,506.00 3,927.92 4,377.15 4,764.77 5,105.52 5,413.48 5,700.37 5,975.20 6,244.66 6,513.58 6,785.48 Marketing, general and administrative 482.00 460.00 511.00 633.54 727.83 816.78 902.26 986.28 1,070.66 1,156.99 1,246.56 1,340.46 1,439.60 Amortization of acquired intangible assets 3.00 ------Research and development 947.00 1,008.00 1,160.00 1,267.07 1,455.65 1,633.57 1,804.52 1,972.55 2,141.33 2,313.99 2,493.13 2,680.92 2,879.21 Goodwill impairment charge ------Depreciation expense 115.00 94.00 71.00 77.00 91.35 99.84 106.28 111.43 115.74 119.55 123.04 126.35 129.57 Implied Interest on PV of Operating Lease - 2.94 2.82 2.59 1.61 1.50 1.27 1.09 0.92 0.81 0.75 0.69 0.58 EBITA (467.00) (561.06) 83.82 432.42 627.90 854.37 1,105.30 1,380.11 1,679.45 2,005.01 2,359.01 2,743.99 3,162.76

Less: Adjusted Taxes Marginal tax rate 33% 36% 33% 10% 8% 8% 10% 11% 10% 12% 11% 11% 12% Provision for Income Tax 14.00 39.00 19.00 24.08 35.30 50.63 86.41 123.04 136.98 202.70 220.27 261.65 332.80 Tax shield on interest expense: (53.50) (55.71) (42.00) (16.87) (13.65) (16.60) (22.88) (27.52) (29.89) (36.67) (38.11) (39.10) (45.56) Tax on interest or investment income (1.67) 28.57 (3.00) (0.60) (0.48) (0.48) (0.60) (0.66) (0.60) (0.72) (0.66) (0.66) (0.72) Tax on any non-operting income - 52.14 1.00 ------Tax shield on any non-operating losses - (24.29) (4.00) ------Restructuring and other special charges, net (43.13) (3.57) ------Legal settlements, net ------Licensing gain - (31.43) (17.33) ------Implied Interest on PV of Operating Lease - 1.05 0.94 0.26 0.13 0.12 0.13 0.12 0.09 0.10 0.08 0.08 0.07 Total Adjusted Taxes 112.30 72.24 83.39 41.29 49.30 67.59 109.76 151.10 167.38 239.99 258.96 301.33 379.01

Change in Deferred Taxes Ending DTL - Ending DTA (3,679.00) (3,526.00) (2,621.00) ------Beginning DTL - Beginning DTA (3,514.00) (3,679.00) (3,526.00) ------Change in Deferred Taxes (165.00) 153.00 905.00 ------

NOPLAT: (744.30) (480.30) 905.43 391.13 578.61 786.78 995.54 1,229.01 1,512.07 1,765.02 2,100.04 2,442.66 2,783.75

Invested Capital (IC) Net Operating Working Capital: Operating Current Assets (CA): Normal Cash (14.62% of Sales) 583.48 624.57 779.10 926.23 1,064.08 1,194.14 1,319.11 1,441.93 1,565.31 1,691.52 1,822.48 1,959.75 2,104.70 Accounts Receivable 533.00 311.00 400.00 506.83 600.46 694.27 789.48 887.65 1,070.66 1,185.92 1,277.73 1,407.48 1,511.58 Inventory 678.00 751.00 739.00 886.95 1,029.88 1,163.92 1,353.39 1,504.07 1,579.23 1,735.49 1,838.68 1,990.58 2,195.40 Prepaid expenses 43.00 63.00 77.00 89.96 102.62 114.35 125.41 136.11 146.68 159.66 169.53 183.64 200.10 Prepayment and other receivables 33.00 32.00 33.00 39.28 50.95 59.22 67.67 75.94 85.65 94.87 99.73 101.88 118.05 Toal Net Operating Working Capital 1,870.48 1,781.57 2,028.10 2,449.25 2,847.99 3,225.89 3,655.06 4,045.70 4,447.53 4,867.47 5,208.15 5,643.34 6,129.83

Non Interest-bearing Current Liabilities Accounts payable 524.00 823.00 796.00 921.79 1,073.55 1,233.34 1,339.86 1,479.41 1,616.70 1,700.78 1,844.91 1,997.29 2,173.80 Accrued Expenses 236.00 195.50 270.50 324.69 369.37 412.48 451.13 498.07 543.36 590.07 638.86 680.28 734.20 Deferred Revenue 53.00 63.00 22.00 31.68 54.59 102.10 103.76 123.28 144.54 150.41 155.82 174.26 179.95 Total Non interest-bearing current liabilities 813.00 1,081.50 1,088.50 1,278.16 1,497.50 1,747.92 1,894.75 2,100.77 2,304.60 2,441.25 2,639.60 2,851.83 3,087.95 Net Operating Working Capital 1,057.48 700.07 939.60 1,171.09 1,350.48 1,477.97 1,760.31 1,944.93 2,142.93 2,426.21 2,568.55 2,791.51 3,041.88

Net Property, Plant, and Equipment 188.00 164.00 261.00 285.25 303.67 318.36 330.70 341.56 351.53 360.99 370.19 379.29 388.39 Net Other Operating Assets Acquisition related intangible assets, net ------Software and technology licenses, net 189.00 234.00 239.00 285.09 327.52 367.55 406.02 443.82 481.80 520.65 560.95 603.21 647.82 Capitalized PV of Operating Leases 51.00 43.00 40.00 42.58 44.64 46.37 47.90 49.29 50.62 51.91 53.19 54.46 55.01 Total Net Other Operating Assets 240.00 277.00 279.00 285.09 327.52 367.55 406.02 443.82 481.80 520.65 560.95 603.21 647.82

Other Operating Liabilities Deferred Revenue (Long-term) 53.00 63.00 22.00 31.68 54.59 102.10 103.76 123.28 144.54 150.41 155.82 174.26 179.95 Warranty liabilities 15.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 Total Other Operating Liabilities 68.00 75.00 34.00 43.68 66.59 114.10 115.76 135.28 156.54 162.41 167.82 186.26 191.95

Invested Capital (IC) 1,417.48 1,066.07 1,445.60 1,697.75 1,915.09 2,049.79 2,381.27 2,595.03 2,819.72 3,145.44 3,331.87 3,587.74 3,886.14

NOPLAT (744.30) (480.30) 905.43 391.13 578.61 786.78 995.54 1,229.01 1,512.07 1,765.02 2,100.04 2,442.66 2,783.75 Beginning Invested Capital 1,792.98 1,417.48 1,066.07 1,445.60 1,697.75 1,915.09 2,049.79 2,381.27 2,595.03 2,819.72 3,145.44 3,331.87 3,587.74 ROIC: -41.51% -33.88% 84.93% 27.06% 34.08% 41.08% 48.57% 51.61% 58.27% 62.60% 66.76% 73.31% 77.59%

NOPLAT (744.30) (480.30) 905.43 391.13 578.61 786.78 995.54 1,229.01 1,512.07 1,765.02 2,100.04 2,442.66 2,783.75 Beginning Invested Capital 1,792.98 1,417.48 1,066.07 1,445.60 1,697.75 1,915.09 2,049.79 2,381.27 2,595.03 2,819.72 3,145.44 3,331.87 3,587.74 WACC 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% EP (963.88) (653.89) 774.87 214.10 370.69 552.25 744.51 937.39 1,194.27 1,419.70 1,714.84 2,034.62 2,344.38 Page | 21 NOPLAT (744.30) (480.30) 905.43 391.13 578.61 786.78 995.54 1,229.01 1,512.07 1,765.02 2,100.04 2,442.66 2,783.75 CapEx (547.49) (351.42) 379.53 252.15 217.34 134.70 331.48 213.77 224.69 325.72 186.42 255.87 298.40 FCF (196.81) (128.88) 525.90 138.98 361.27 652.08 664.06 1,015.25 1,287.38 1,439.30 1,913.62 2,186.78 2,485.35

Advanced Micro Devices, Inc. Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity Beta (5Y WK) 1.98 Risk-free Rate (10Y Treasury yield) 3.08% Market Risk Premium 4.99% Cost of Equity 12.96%

Cost of Debt (BloomBerg: 10Y Bond) Before Tax Cost of Debt 5.76% Tax Rate 21.00% After Tax Cost of debt 4.55%

Market Value of Equity Share Price $21.03 Shares Outstanding (in Million) 974.87 Market Value of Equity (in Million) $20,501.52

Market Value of Debt ( 2017 10k: in Million) 1901

Weights % Equity 91.51% % Debt 8.49%

WACC 12.246%

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Advanced Micro Devices, Inc. Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 4.00% I need to come up a reason here CV ROIC 74.50% WACC 12.25% Cost of Equity 12.96%

Fiscal Years Ending Dec. 30 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV

DCF Model Free Cash Flow 138.98 361.27 652.08 664.06 1,015.25 1,287.38 1,439.30 1,913.62 2,186.78 2,485.35 Counting Value 33,222.29 CF to Discount 138.98 361.27 652.08 664.06 1,015.25 1,287.38 1,439.30 1,913.62 2,186.78 33,222.29 Present Value of FCF 123.82 286.74 461.09 418.33 569.78 643.68 641.12 759.41 773.13 11745.64

Vale of Operating Assets 16422.74 Excess Cash (14.62%) 779.10 Joint Ventures 59.00 Long term Investment 58.00 -PV operating lease 201 -Total Debt 1901.41 -ESOP 2614.36 Value of Equity$ 12,601.66

Shares Outstanding 974.87

Intrinsic Value of Equity$ 12.93

EP Model NOPLAT 391.13 578.61 786.78 995.54 1,229.01 1,512.07 1,765.02 2,100.04 2,442.66 2,783.75 Beg. IC 1,445.60 1,697.75 1,915.09 2,049.79 2,381.27 2,595.03 2,819.72 3,145.44 3,331.87 3,587.74 ROIC 27.06% 34.08% 41.08% 48.57% 51.61% 58.27% 62.60% 66.76% 73.31% 77.59% WACC 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% 12.25% EP 214.10 370.69 552.25 744.51 937.39 1194.27 1419.70 1714.84 2034.62 2344.38 Continuing Value 29634.55 Present Value of FCF 190.74 294.22 390.50 469.01 526.09 597.13 632.40 680.52 719.33 10477.20

Vale of Operating Assets 16422.74 Excess Cash (14.62%) 779.10 Joint Ventures 59.00 Long term Investment 58.00 -PV operating lease 201 -Total Debt 1901.41 -ESOP 2614.36 Value of Equity$ 12,601.66

Shares Outstanding 974.87

Intrinsic Value of Equity $ 12.93

For Discounting: Number of Periods 1 2 3 4 5 6 7 8 9 9

Model Date 11/10/2018 Next FYE 12/31/2018 Last FYE 12/31/2017 Days in FY 365 Days to FYE 314 Elapsed Fraction 0.860 Adjusted Target Price $ 14.99 Page | 23

Advanced Micro Devices, Inc. Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV

EPS 0.22 0.39 0.53 0.71 0.91 1.13 1.36 1.63 1.94 2.23

Key Assumptions CV growth 4.00% CV ROE 18.78% Cost of Equity 12.96%

Future Cash Flows P/E Multiple (CV Year) 8.78 EPS (CV Year) 2.23 Future Stock Price 19.61 Dividends Per Share 0.17 0.31 0.42 0.56 0.72 0.89 1.07 1.28 1.52 1.76 Future Cash Flows 0.15 0.24 0.29 0.34 0.39 0.43 0.46 0.48 0.51 6.55 Discounted Cash Flows 9.84

Intrinsic Value $ 9.84

For Discounting: Number of Periods 1 2 3 4 5 6 7 8 9 9

Model Date 11/10/2018 Next FYE 12/31/2018 Last FYE 12/31/2017 Days in FY 365 Days to FYE 314 Elapsed Fraction 0.860 Intrinsic Value $ 10.93

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Advanced Micro Devices, Inc. Relative Valuation Models

EPS EPS Ticker Company Price 2018E 2019E P/E 18 P/E 19 MU Micron Technology, Inc. $35.40 $11.51 $10.51 3.08 3.37 NXPI NXP Semiconductors N.V. $70.95 $6.84 $8.18 10.37 8.67 QCOM QUALCOMM Incorporated $62.48 $3.62 $4.31 17.26 14.50 INTC Intel Corporation $45.69 $4.16 $4.26 10.98 10.73 AMAT Applied Materials, Inc. $32.36 $4.45 $4.09 7.27 7.91 Taiwan Semiconductor TSM Manufacturing Company $38.07 $2.27 $2.47 16.77 15.41 Limited Average 10.96 10.10

AMD Advanced Micro Devices, Inc. $21.03 $0.22 $0.39 97.0 54.3

Implied Relative Value: P/E (EPS18) $ 2.38 P/E (EPS19)$ 3.91 PEG (EPS18)$ 2.38 PEG (EPS19)$ 3.91 P/B$ 71.24 P/Tangible BV$ 59.36

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Advanced Micro Devices, Inc. Key Management Ratios

Fiscal Years Ending 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV

Liquidity Ratios Current Ratio 1.65 1.88 1.76 1.78 1.92 2.27 2.51 2.58 3.07 3.23 3.85 4.23 4.63 Quick Ratio 1.17 1.32 1.27 1.25 1.43 1.75 1.96 2.09 2.54 2.74 3.31 3.69 4.08 Cash Ratio 0.56 0.94 0.80 0.73 0.95 1.24 1.43 1.62 1.99 2.21 2.74 3.11 3.50 Payables Turnover

Activity or Asset-Management Ratios Inventory Turnover 4.29 4.36 4.74 4.53 4.35 4.19 3.85 3.68 3.69 3.51 3.46 3.34 3.15 Inventory Period 87.85 85.58 78.66 82.42 85.88 89.16 96.76 101.41 101.12 106.01 107.47 111.55 118.09 Asset Turnover 1.29 1.29 1.51 1.61 1.42 1.31 1.22 1.07 1.02 0.91 0.85 0.78 0.72

Financial Leverage Ratios Debt to Equity Ratio -5.43 3.45 2.28 1.20 1.00 0.69 0.57 0.57 0.40 0.39 0.30 0.25 0.22 Debt to Asset Ratio 0.73 0.43 0.39 0.30 0.30 0.25 0.23 0.25 0.20 0.21 0.17 0.15 0.14 Debt to Capital Ratio 1.23 0.78 0.70 0.55 0.50 0.41 0.36 0.36 0.29 0.28 0.23 0.20 0.18

Profitability Ratios Gross profit Ratio 27.06% 23.36% 34.21% 36.56% 38.49% 40.36% 42.18% 43.94% 45.64% 47.29% 48.89% 50.44% 51.94% Return on Asset -21.40% -14.97% 1.21% 5.50% 7.90% 9.33% 10.54% 10.82% 11.70% 11.69% 12.17% 12.33% 12.13% Return on Equality 160.19% -119.47% 7.04% 22.15% 26.44% 25.67% 25.63% 24.80% 23.56% 22.17% 21.04% 20.02% 18.78% Operating margin -45.88% -53.28% -31.58% -26.88% -23.02% -19.27% -15.64% -12.12% -8.72% -5.42% -2.22% 0.88% 3.89%

Payout Policy Ratios Payout Ratio 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

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Structual assumption Risk-free rate $ 14.99 2.60% 2.70% 2.80% 2.90% 3.08% 3.10% 3.20% 3.30% 3.40% 3.50% 4.85% 17.36 17.02 16.69 16.37 15.80 15.74 15.44 15.15 14.86 14.58 4.90% 17.03 16.70 16.37 16.06 15.51 15.45 15.15 14.87 14.59 14.31 Market 4.95% 16.70 16.38 16.06 15.75 15.22 15.16 14.87 14.59 14.32 14.05 Risk 4.99% 16.45 16.13 15.82 15.52 14.99 14.93 14.65 14.37 14.11 13.84 Premium 5.50% 13.58 13.33 13.08 12.84 12.42 12.38 12.15 11.93 11.72 11.50 6.00% 11.33 11.13 10.93 10.74 10.39 10.36 10.17 9.99 9.81 9.64 6.50% 9.50 9.33 9.17 9.01 8.72 8.69 8.54 8.39 8.24 8.10 7.00% 7.99 7.85 7.71 7.57 7.33 7.31 7.18 7.05 6.93 6.80

WACC $ 14.99 10.00% 10.50% 11.00% 11.50% 12.00% 12.50% 13.00% 13.50% 14.00% 14.50% 3.25% 22.28 19.92 17.89 16.12 14.56 13.18 11.96 10.86 9.88 8.99 3.50% 23.04 20.56 18.42 16.57 14.94 13.51 12.24 11.11 10.09 9.17 3.75% 23.87 21.24 18.99 17.05 15.35 13.86 12.54 11.37 10.31 9.37 CV 4.00% 24.77 21.98 19.60 17.56 15.78 14.23 12.85 11.64 10.55 9.57 Growth 4.25% 25.75 22.78 20.26 18.10 16.24 14.61 13.19 11.92 10.80 9.79 4.50% 26.82 23.64 20.96 18.69 16.73 15.03 13.54 12.22 11.06 10.01 4.75% 27.98 24.57 21.73 19.31 17.25 15.47 13.91 12.54 11.33 10.25 5.00% 29.27 25.59 22.55 19.99 17.81 15.94 14.31 12.88 11.62 10.50

COGS $ 14.99 52.50% 55.00% 57.50% 60.00% 62.00% 65.00% 67.50% 70.00% 72.50% 75.00% 19.50% 24.40 22.08 19.75 17.43 15.57 12.77 10.44 8.09 5.74 3.34 20.00% 23.83 21.50 19.18 16.85 14.99 12.19 9.86 7.51 5.15 2.73 20.50% 23.25 20.93 18.60 16.27 14.41 11.61 9.28 6.93 4.56 2.10 R&D 21.10% 22.56 20.24 17.91 15.58 13.72 10.92 8.58 6.23 3.84 1.31 Margin 21.50% 22.10 19.78 17.45 15.12 13.26 10.46 8.12 5.76 3.36 0.73 22.00% 21.53 19.20 16.87 14.55 12.68 9.88 7.53 5.17 2.75 -0.12 22.50% 20.95 18.63 16.30 13.97 12.10 9.30 6.95 4.58 2.12 -1.56 Page | 27

22.90% 20.49 18.16 15.84 13.51 11.64 8.84 6.48 4.10 1.61 -16.76 CV Growth of NOPLAT $ 14.99 3.60% 3.70% 3.80% 3.90% 4.00% 4.10% 4.20% 4.30% 4.40% 4.50% 55.00% 20.71 20.90 21.10 21.30 21.50 21.71 21.93 22.15 22.38 22.61 57.50% 18.45 18.62 18.80 18.99 19.18 19.37 19.57 19.77 19.98 20.20 60.00% 16.18 16.34 16.51 16.68 16.85 17.03 17.21 17.40 17.59 17.79 COGS 62.00% 14.36 14.51 14.67 14.83 14.99 15.15 15.32 15.50 15.68 15.86 65.00% 11.64 11.77 11.91 12.05 12.19 12.34 12.49 12.64 12.80 12.97 67.50% 9.36 9.48 9.60 9.73 9.86 9.99 10.12 10.26 10.40 10.55 70.00% 7.07 7.18 7.29 7.40 7.51 7.63 7.75 7.87 8.00 8.13 72.50% 4.76 4.86 4.95 5.05 5.15 5.25 5.36 5.47 5.58 5.69

Beta

$ 14.99 1.78 1.83 1.88 1.93 1.98 2.04 2.09 2.14 2.19 2.24 18.50% 20.17 19.22 18.34 17.50 16.72 15.83 15.14 14.49 13.87 13.29 19.00% 19.51 18.59 17.72 16.91 16.14 15.28 14.60 13.96 13.36 12.79 R&D 19.50% 18.86 17.96 17.11 16.31 15.57 14.72 14.06 13.44 12.85 12.29 Expendit ure 20.00% 18.21 17.33 16.50 15.72 14.99 14.17 13.52 12.91 12.34 11.79 20.50% 17.55 16.69 15.89 15.13 14.41 13.61 12.98 12.39 11.82 11.29 21.00% 16.90 16.06 15.27 14.53 13.84 13.05 12.44 11.86 11.31 10.79 21.50% 16.25 15.43 14.66 13.94 13.26 12.49 11.90 11.33 10.80 10.29 22.00% 15.59 14.79 14.05 13.34 12.68 11.94 11.36 10.81 10.28 9.79

Risk-free rate $ 14.99 2.60% 2.70% 2.80% 2.90% 3.08% 3.10% 3.20% 3.30% 3.40% 3.50% 3.25% 15.15 14.87 14.60 14.33 13.86 13.81 13.56 13.32 13.08 12.84 3.50% 15.55 15.26 14.98 14.70 14.22 14.16 13.90 13.65 13.40 13.16 3.75% 15.99 15.68 15.39 15.10 14.59 14.54 14.27 14.00 13.74 13.49 CV 4.00% 16.45 16.13 15.82 15.52 14.99 14.93 14.65 14.37 14.11 13.84 Growth 4.25% 16.93 16.60 16.28 15.96 15.41 15.35 15.06 14.77 14.49 14.22 4.50% 17.46 17.11 16.77 16.44 15.86 15.80 15.49 15.19 14.90 14.61 Page | 28 4.75% 18.02 17.65 17.29 16.94 16.34 16.27 15.95 15.64 15.33 15.03 5.00% 18.62 18.23 17.86 17.49 16.85 16.78 16.45 16.12 15.79 15.48 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 146,000,000 Average Time to Maturity (years): 3.02 Expected Annual Number of Options Exercised: 48,273,207

Current Average Strike Price:$ 3.43 Cost of Equity: 9.00% Current Stock Price: $21.03

2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CV Increase in Shares Outstanding: 48,273,207 48,273,207 48,273,207 965,464 0 0 0 0 0 0 Average Strike Price:$ 3.43 $ 3.43 $ 3.43 $ 3.43 $ 3.43 $ 3.43 $ 3.43 $ 3.43 $ 3.43 $ 3.43 Increase in Common Stock Account: 165,722,581 165,722,581 165,722,581 3,314,452 ------

Change in Treasury Stock 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 Expected Price of Repurchased Shares:$ 21.03 $ 22.92 $ 24.99 $ 27.23 $ 29.69 $ 32.36 $ 35.27 $ 38.44 $ 41.90 $ 45.67 Number of Shares Repurchased: 713,267 654,373 600,342 550,773 505,296 463,574 425,298 390,181 357,965 328,408

Shares Outstanding (beginning of the year) 952,000,000 999,559,940 1,047,178,774 1,094,851,639 1,095,266,330 1,094,761,034 1,094,297,459 1,093,872,162 1,093,481,980 1,093,124,016 Plus: Shares Issued Through ESOP 48,273,207 48,273,207 48,273,207 965,464 0 0 0 0 0 0 Less: Shares Repurchased in Treasury 713,267 654,373 600,342 550,773 505,296 463,574 425,298 390,181 357,965 328,408 Shares Outstanding (end of the year) 999,559,940 1,047,178,774 1,094,851,639 1,095,266,330 1,094,761,034 1,094,297,459 1,093,872,162 1,093,481,980 1,093,124,016 1,092,795,608

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Advanced Micro Devices, Inc. Key Assumptions of Valuation Model

Company Info Ticker Symbol AMD Current Share Price $21.03 Current Model Date 11/10/2018 FY End (month/day) Dec. 30 Intrinsic Value of Equity $ 14.99

Financial Statistics Pre-Tax Cost of Debt 5.76% Beta 1.98 Risk-Free Rate 3.08% Corporate Tax Rate 21.00% Shares Outstanding (in Million) 974.87 Equity Risk Premium 4.99% Market Value of Debt (in Million) 1303 CV Growth of NOPLAT 4.00% CV ROIC 74.50% WACC 12.25% Cost of Equity 12.96% CV ROE 18.78% Current Dividend Yield 0 Marginal Tax Rate 33% Effective Tax Rate 35% Inflation 2.30% Nornimal GDP Growth 2.50%

Operating assumptions Rev Growth of PC sector in Initial year 15.00% Rev Growth of Enterprise sector in Initial year 24.00% Cost of sales 62.00% Research and development 20.00% Marketing, general and administrative 10.00%

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VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol AMD Current Stock Price $21.03 Risk Free Rate 3.08% Current Dividend Yield 0.00% Annualized St. Dev. of Stock Returns 38.80%

Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 52,000,000 3.73 3.00 $ 17.63 $ 917,006,860 Range 2 51,000,000 2.61 3.07 $ 18.66 $ 951,471,435 Range 3 43,000,000 4.05 3.00 $ 17.35 $ 745,879,079 Total 146,000,000$ 3.43 3.02$ 17.91 $ 2,614,357,374

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Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Operating Operating Operating Fiscal Years Ending Dec. 30 Leases Fiscal Years Ending Dec. 30 Leases Fiscal Years Ending Leases 2018 40 2017 49 2016 51 2019 35 2018 51 2017 50 2020 31 2019 46 2018 45 2021 29 2020 43 2019 28 2022 28 2021 64 2020 26 Thereafter 92 Thereafter 135 Thereafter 106 Total Minimum Payments 255 Total Minimum Payments 388 Total Minimum Payments 306 Less: Interest 54 Less: Interest 81 Less: Interest 63 PV of Minimum Payments 201 PV of Minimum Payments 307 PV of Minimum Payments 243

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 5.76% Pre-Tax Cost of Debt 5.76% Pre-Tax Cost of Debt 5.76% Number Years Implied by Year 6 Payment 3.3 Number Years Implied by Year 6 Payment 2.1 Number Years Implied by Year 6 Payment 4.1

Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 40 37.8 1 49 46.3 1 51 48.2 2 35 31.3 2 51 45.6 2 50 44.7 3 31 26.2 3 46 38.9 3 45 38.0 4 29 23.2 4 43 34.4 4 28 22.4 5 28 21.2 5 64 48.4 5 26 19.7 6 & beyond 28 61.7 6 & beyond 64 93.6 6 & beyond 26 69.6 PV of Minimum Payments 201.4 PV of Minimum Payments 307.1 PV of Minimum Payments 242.6

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Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013)

Operating Operating Fiscal Years Ending Leases Fiscal Years Ending Leases 2015 50 2014 59 2016 46 2015 51 2017 43 2016 43 2018 41 2017 40 2019 27 2018 39 Thereafter 133 Thereafter 156 Total Minimum Payments 340 Total Minimum Payments 388 Less: Interest 77 Less: Interest 86 PV of Minimum Payments 263 PV of Minimum Payments 302

Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 5.76% Pre-Tax Cost of Debt 5.76% Number Years Implied by Year 6 Payment 4.9 Number Years Implied by Year 6 Payment 4.0

Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment 1 50 47.3 1 59 55.8 2 46 41.1 2 51 45.6 3 43 36.3 3 43 36.3 4 41 32.8 4 40 32.0 5 27 20.4 5 39 29.5 6 & beyond 27 85.4 6 & beyond 39 102.7 PV of Minimum Payments 263.3 PV of Minimum Payments 301.9

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