Advanced Micro Devices Inc. (NASDAQ:AMD)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) initially increased substantially before experiencing considerable declines, ultimately recovering partially in the most recent year. Invested capital exhibited a marked increase, followed by stabilization. The cost of capital remained relatively stable throughout the period.

NOPAT Trend

NOPAT increased from US$1,330 million in 2020 to US$3,517 million in 2021, representing a substantial improvement in operational profitability. However, NOPAT then decreased dramatically to a loss of US$138 million in 2022 and further to a loss of US$201 million in 2023. A partial recovery was observed in 2024, with NOPAT reaching US$621 million.

Cost of Capital

The cost of capital remained consistently around 21.5%, fluctuating within a narrow range of 21.26% to 21.57% over the five-year period. This suggests a stable risk profile and financing structure for the company.

Invested Capital

Invested capital increased significantly from US$4,364 million in 2020 to US$6,195 million in 2021. A substantial increase was then observed in 2022, reaching US$58,525 million. Invested capital remained relatively stable in 2023 and 2024, at US$57,883 million and US$58,227 million respectively, indicating a potential completion of major investment initiatives.

Economic Profit

Economic profit mirrored the NOPAT trend. It rose from US$391 million in 2020 to US$2,181 million in 2021. However, economic profit then declined sharply, resulting in substantial losses of US$12,578 million in 2022 and US$12,619 million in 2023. A modest improvement occurred in 2024, with economic profit reaching a loss of US$11,865 million. The magnitude of the losses in economic profit suggests that the returns generated were insufficient to cover the cost of capital employed, particularly in 2022 and 2023.

The significant increase in invested capital, coupled with the decline in NOPAT, appears to be the primary driver of the negative economic profit observed in 2022, 2023, and 2024. While NOPAT showed some recovery in the latest year, it was not sufficient to offset the high level of invested capital and associated cost of capital, resulting in continued economic losses.

The financial data reveals fluctuating profitability and operational efficiency over the five-year period under review.

Net Income

Net income experienced growth from 2020 to 2021, increasing from 2,490 million US dollars to 3,162 million US dollars. However, it sharply declined in 2022 to 1,320 million US dollars, and further decreased in 2023 to 854 million US dollars. In 2024, there was a recovery with net income rising to 1,641 million US dollars, though it remained below the peak values seen in 2020 and 2021.

Net Operating Profit After Taxes (NOPAT)

NOPAT displayed a volatile pattern during the same period. It increased significantly from 1,330 million US dollars in 2020 to 3,517 million US dollars in 2021, indicating strong operational performance. However, in 2022 and 2023, NOPAT turned negative, with losses of 138 million US dollars and 201 million US dollars respectively, suggesting operational inefficiencies or extraordinary expenses. In 2024, NOPAT returned to a positive figure of 621 million US dollars, though this value remained substantially lower than the earlier years.

Overall, the data indicates that while the company demonstrated solid profitability growth through 2021, it subsequently faced challenges in maintaining operational profitability, as seen in the negative NOPAT values for two consecutive years. The partial recovery in 2024 suggests improvements but does not yet reflect a full return to previous performance levels. The divergence between net income and NOPAT in the recent years may warrant further examination to understand underlying causes such as non-operating items or tax impacts.

Income Tax Provision (Benefit)

The income tax provision exhibited considerable volatility over the reported periods. It began with a significant tax benefit of -$1,210 million in 2020, indicating a tax gain or credit. This shifted to a tax expense of $513 million in 2021. Subsequently, the tax provision returned to a benefit state in 2022 and 2023, with figures of -$122 million and -$346 million respectively, before moving back to a tax expense of $381 million in 2024. These fluctuations suggest variability in taxable income or changes in tax strategies and regulations, impacting the company’s tax obligations year over year.

Cash Operating Taxes

The cash operating taxes demonstrated an overall upward trend during the period under review. Starting from a relatively low base of $24 million in 2020, the amount escalated to $214 million in 2021. This increase continued sharply to $1,392 million in 2022, followed by a decline to $658 million in 2023. However, in the final period, cash taxes rose again to $1,531 million in 2024, marking the highest value recorded in the series. This pattern indicates increased cash tax payments despite the oscillation in reported tax provisions, which could reflect timing differences between accounting tax expense and actual tax payments or changes in the company’s taxable income and cash flows.

Total reported debt & leases

The total reported debt and leases experienced a moderate increase from 572 million USD in 2020 to 732 million USD in 2021. However, there was a significant surge in 2022, reaching 2956 million USD, more than quadrupling the previous year's amount. Following this peak, the debt slightly increased to 3109 million USD in 2023 before declining to 2321 million USD in 2024. Overall, despite fluctuations, the values remain substantially elevated relative to the initial years, indicating increased financial leverage or obligations.

Stockholders’ equity

Stockholders' equity showed steady growth from 5837 million USD in 2020 to 7497 million USD in 2021. A substantial rise occurred in 2022, jumping dramatically to 54750 million USD, with continued growth in subsequent years reaching 55892 million USD in 2023 and 57568 million USD in 2024. This marked increase in equity suggests either significant retained earnings, capital infusions, or revaluation adjustments with an emphasis on strengthening the company's financial foundation over time.

Invested capital

Invested capital followed a similar trend to stockholders' equity, beginning at 4364 million USD in 2020 and increasing to 6195 million USD in 2021. A notable surge occurred in 2022, reaching 58525 million USD, which was maintained with a slight decrease to 57883 million USD in 2023 and a minor uptick to 58227 million USD in 2024. The fluctuations suggest strategic capital allocation or acquisitions that contributed to a substantial increase in the total capital invested in the business.

The economic spread ratio exhibited a significant shift over the observed period. Initially positive, the ratio transitioned to negative values and remained so through the end of the analyzed timeframe. This shift correlates with substantial changes in economic profit and invested capital.

Economic Spread Ratio Trend

In 2020, the economic spread ratio stood at 8.95%. This figure increased substantially to 35.20% in 2021, indicating a strong positive spread between returns and the cost of capital. However, beginning in 2022, the ratio experienced a dramatic decline, falling to -21.49%. This negative trend continued in 2023 with a ratio of -21.80%, and persisted in 2024, registering at -20.38%. The consistent negative values suggest that the company’s returns on invested capital were consistently below its cost of capital during these later years.

Relationship to Economic Profit

The economic spread ratio’s trajectory mirrors the changes in economic profit. Economic profit was positive in 2020 and 2021, aligning with the positive economic spread ratio values. However, economic profit became significantly negative in 2022 and remained negative through 2024. This negative economic profit directly contributed to the negative economic spread ratio observed during those years.

Relationship to Invested Capital

Invested capital increased from US$4,364 million in 2020 to US$6,195 million in 2021. A substantial increase occurred in 2022, reaching US$58,525 million, and remained relatively stable at US$57,883 million in 2023 and US$58,227 million in 2024. While invested capital grew significantly, the concurrent decline in economic profit resulted in the observed negative economic spread ratio. The large increase in invested capital, without a corresponding increase in economic profit, appears to be a key driver of the ratio’s decline.

In summary, the economic spread ratio indicates a deteriorating financial performance in terms of value creation. While the company initially demonstrated a strong ability to generate returns exceeding its cost of capital, this trend reversed, and the company experienced consistent value destruction in the later years of the period, as evidenced by the negative economic spread ratio.

The economic profit margin exhibited significant fluctuations over the observed period. Initially positive, it transitioned to substantial negative values, with a recent indication of partial recovery.

Economic Profit Margin Trend

In 2020, the economic profit margin stood at 4.00%. This increased considerably to 13.27% in 2021, representing a period of strong economic profit generation relative to net revenue. However, a dramatic shift occurred in 2022, with the margin plummeting to -53.29%. This negative trend continued in 2023, reaching -55.64%, indicating a substantial economic loss. The most recent year, 2024, shows a partial improvement, with the margin increasing to -46.01%, though it remains significantly negative.

The economic profit itself mirrors this trend. Positive in 2020 and 2021, it became substantially negative in 2022 and remained so through 2024. The magnitude of the negative economic profit increased from US$12,578 million in 2022 to US$12,619 million in 2023, before decreasing slightly to US$11,865 million in 2024.

Relationship between Net Revenue and Economic Profit Margin

Net revenue increased consistently from 2020 to 2022, growing from US$9,763 million to US$23,601 million. While revenue experienced a slight decrease in 2023 to US$22,680 million, it rebounded to US$25,785 million in 2024. Despite the revenue growth, the economic profit margin deteriorated significantly, suggesting that the cost of capital, or other factors impacting economic profit calculation, increased at a faster rate than revenue, or that operational efficiencies declined. The 2024 revenue increase is accompanied by a less negative, but still negative, economic profit margin, indicating some improvement in the relationship but not a return to profitability.

The substantial decline in the economic profit margin warrants further investigation into the underlying drivers, including cost structure, capital allocation, and competitive pressures. The partial recovery observed in 2024, while positive, requires continued monitoring to determine if it represents a sustainable trend.