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Analysts:

Investment Thesis

Earnings Estimates

Target Price $12.95 – $17.35

Company Description

Relative Financial Performance

Krause Fund Research Fall 2018

Technology (Alpha)

November 9th, 2018 Jintao He Weiqing Yan jintao-he@uiowa.edu weiqing-yan@uiowa.edu

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 crush AMD’s new 7nm technology since they are able to invest more in R&D.

Stock Rating:

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 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.

60.5

7.04

34.21

14.4

25.1

44

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10

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30

40

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60

70

P/E ROE Gross Margin

AMD Industry

Advanced Micro Devices, Inc. (NASDAQ: AMD)

SELL

12 Month Performance

Source: Ycharts U.S. semiconductor Source: FactSet

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On behalf of the University of Iowa Krause Fund, our team of equity research analysts recommends a SELL rating for Advanced Micro Devices, Inc. We based our decision after extensive research and analysis at both the macro-level and the company level. Having considered the macroeconomic environment and company-specific opportunities, as well as the risks, we believe that our models support our recommendation of the SELL rating. Although the general market environment for semiconductor industry is favorable, there are high levels of competition within the industry and of uncertainty on future international trade regulations. Therefore, we conclude that the target price of AMD’s stock will fall between $12.95 and $17.35.

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 from the 2008 financial crisis. Despite the current trade war between the U.S. and China, the United States is still one of the strongest economies in the world. As such, we expect the real GDP to remain stable at around 3.0% with the GDP growth around 2.5%. With the steadily increasing GDP, the microenvironment should provide a steady demand for the semiconductor industry. However, the trade war between the U.S. and China might cause some companies, in the semiconductor industry, including AMD, to over-produce or over-place their orders. In general, however, we expect both a steady increase in the U.S. real GDP and consistent demands in the semiconductor industry.

U.S. real GDP Growth Rate (%)

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

Unemployment rate A low unemployment rate is a good sign for both AMD and the semiconductor industry. As the unemployment rate remains low, there is a stable disposable income for the public to spend on new personal computers, server-based cloud services, and other microprocessor related segments. The chart below indicates that the U.S. currently has a 3.7% unemployment rate, with the annual mean of 5.77%, which is all-time low within the past five years. We expect that the unemployment rate will continue to be less than 4% over the next 6 months. This low unemployment rate indicates a potential positive impact on AMD’s revenue. However, there is also the potential risk of inflation, due to the increase in wages, which may result in both increased COGS, and decreased net income and margin, at AMD.

US Unemployment Rate (%)

Figure 3 (Source: S&P 500 PE Ratio) Interest rate In addition to an increase in wages and the subsequent potential risk of inflation, the Federal Reserve also raised the FED Funds rate in September to 2.25%. As the chart below shows, the interest rates have hiked since 2017. The rise in interest rates led to a rise in the cost of debt for all companies in the semiconductor industry. The interest hike has had a significant impact on AMD, due to the company’s future debt, which is presently $1,704 million. Until AMD pays out the full debt amount, higher interest rates will result in higher 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.

Executive Summary

Economic Outlook

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U.S. FED Fund Rate (%)

Figure 4 (Source: TradingEconomics) Strengthening Dollar The increasing strength of the dollar is likely to put pressure on the United States’ exports. AMD strongly depends on its revenue from international sales. In 2017, AMD reported that 66% of its total sales were from Asia, while only 26% of its total sales were conducted in the U.S. Also, 33% of AMD’s total sales were from China, including Taiwan3. These international sales are highly sensitive to currency changes. The following chart shows how the US dollar has 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 5 (Source: Bloomberg quote: USDCNY)

The semiconductor industry involves various companies that design and produce: high-value and commercial type circuit boards, microprocessors, computing process units (CPU), memory chips, integrated circuits, fuel and solar cells, all of which are essential to the personal computers and data processing servers. The following chart depicts the steady annual sales growth (9.5%) of the industry over the past ten years globally. We believe that the industry will continue to grow at a rate of 9% over the next five years.

Global Semiconductor sales

Figure 6 (Source: FactSet Semiconductor industry) The semiconductor industry is known for being small, fast, and cheap4. For example, new technologies in the industry will lower the cost of chip by 50%. As a result, companies in the industry have the constant pressure of producing cheaper and better products. Even when the market is low, the industry will continue to upgrade and develop new products. Products The industry offers four primary types of product:

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 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.

Microprocessors: Microprocessors are the basic and crucial

central processing unit for the modern PCs and servers, containing logic operations to compute. From 2013 to 2018, the microprocessors remained their steady annual market shares of 45% of total products in the industry. Microprocessors segment had steady annual sales increase of 1.7% even with 2015’s negative increase of 0.3% and 2016’s -0.9%.

However, the microprocessor companies in the U.S. faced the challenge of lower-cost producers, particularly from

Industry Analysis

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Asia, which may cause the segment’s sales to drop in the 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 The Semiconductor industry has the following major demand determinants: Technology Change and Product Innovation Product Life Span Reach and Development Expenditures New technology and Products innovation Innovations and the use of new technology in the semiconductor industry have strong correlation with the increasing demand. Consumers expect the company in the industry to continue revolute their existing products. Meanwhile, the development and the evolution of other electronics, such as personal computers and smartphones, also demand the products innovation for their corresponding semiconductors. Additionally, 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 the highest research and development (R&D) expenditure among all other industries6. The industry bench of R&D expenditure has already reached to $34 billion excluding the private institutes, such as research universities. We expect that more research partnerships and universities invest more into the semiconductor R&D in order to keep path of the rapid technological, even more R&D expenditures from the companies inside the industry.

Major markets

Figure 8 (Source: IBISWorld) Exports The biggest portion of the industry came from countries outside the United States. In 2018, exports contribute 56% of the total industry revenue7. However, the size of the segment has been shirking 3.5% since 2013, largely due to the global competition and strengthening in dollars. However, exports are still the largest segment so far in the total industry sales. The following chart shows that 64.3% of the total export revenue is from Asia/Pacific area. In 2017, AMD had 70% of its total revenue came from outside the United States.

2017 Geographic Revenue vs Domicile (%)

Figure 9 (Source: FactSet semiconductor industry) Personal Computers PC segment has been growing at a steady annual growing rate of 2% over the last five years, consuming the shares from the servers and desktop segment. The industry shows that the trend of shifting the focus from desktop computing-based chips to 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

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13.9% of the total industry revenue8. The segment has shown an increasing trend since 2013 because of the technology improvement in smartphones, tablets, and other portable communication devices. We expect the segment continue to grow in the future because of the potential commercialization in the 5G communication system. Automobile and consumer electronics With the expansion of the communication segment, the sales of automobiles are also increasing. In 2018, the automobile segment is expected to have 5.9% of the total industry revenue8. However, different from the other segments, automobile microprocessors are usually simple “embedded system” chip, which aimed to perform fewer computing tasks. Due to the chip’s simplicity, automobile segments have much margin than other segments have. Companies rely heavily on price competition. Industrial and government In 2018, the industrial and military demand contributes 6.1% of the total industry sales8. Products in this segment are often customized to meet the specific need for certain areas and the government project. Industrial and government segment has excited decade-long for semiconductor industry. We expect the segment’s share to stay around 6% in the next 12 months. Market shares and Competition The general industry has low market share concertation. However, there is high concertation on specific market shares and products. In other word, a company cannot dominate the whole market, but it can be the monopoly in a specific market. For instance, Intel occupies 30% of the market shares in the CPU and desktop and PC computing industry, while it occupies 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 10 (Source: Bloomberg Semiconductor industry)

High competition in the industry and the trend is increasing. The integrated circuits market has shown high competitions among companies over past five years, e.g. Intel and AMD. The companies include the following factors while setting their market strategies. Price: Companies will outsource the production and

packing processes to foreign companies in order to lower the costs and maintain a lower price which is than that of their competitors.

Production output: With the increase in the production volume, companies often experience decreasing accumulated costs; hence, lowering their prices. Thus, companies in the industry often have over-production or over-ordering situations in supplies while trying to control the production cost.

Product performance: Products’ high performance,

reliability, quality, and low power consumption often attract consumer to pay higher premium for the products.

Technologies: Products performance often result from the technology innovation. For this reason, companies often invest heavily in the R&D and new technologies. On the other hand, the developments of new technologies are highly uncertain and complex, which resulted in the short products life cycle in the industry.

The following chart shows that the price of semiconductor and electronic components employs a steady annual decline rate of 1.2%, with the fact that increasing decline within past five years (1.4% annual decline rate). We expect a shaper decline rate in the next 5 five years.

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 costs in the production due to low production volume. Also,

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from the perspective of customer relationship, it will be 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 income for companies in the U.S. semiconductor industry is approximately $7 billion, indicates that this is an extremely profitable industry9. Intel, the biggest player in the CPU market, has been running the industry revenue for the past five years. Companies serve niche market including NVidia has experience the rapid increase due to the technology change and product innovation, but still generate much less income than the market leader.

2017 US semiconductor net income ($, billion)

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 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 margin in the industry, 2.5% more than the next leading player Intel9.

2017 US semiconductor gross profit margin (%)

Figure 13 (Source: Ycharts U.S. semiconductor) Debt-to-Equity ratio: The following chart shows five historical Debt-to-Equity ratio in the semiconductor industry. The industry had high average debt-of-equity ratio of 0.7 from 2014 to 2017, suggesting companies often use debt to finance their projects which carried high risks. However, the recent data depicts the overall decreased risk for the industry. AMD has the highest debt-to-equity ratio on average in the industry over the past five years, suggesting AMD carries on average higher risks than other companies in the industry9.

2017 US semiconductor Debt-to-Equity

Figure 14 (Source: Ycharts U.S. semiconductor) P/E Ratio: The following chart shows five historical P/E Ratio in the semiconductor industry. The chart depicts the industry has 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

Figure 15 (Source: Ycharts U.S. semiconductor) Conclusion The industry has

Average annual growth of 1.7%, net $52.6 billion revenue, net in 2017 $2.7 billion profit, net in 2017 Short product life span High R&D expenditures High globalization and barriers High concertation on specific segment

We expect the industry to continue grow and expend, and have:

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 Overview Advanced Micro Devices, Inc. (AMD) is a multinational semiconductor company founded on May 1, 1969, and headquartered in Santa Clara, California. AMD manufactures microprocessors, the essential processing unit for the modern computers and servers. AMD operates through the Computing and Graphics, and Enterprise, Embedded and Semi-Custom segments10.

Computing and Graphics: AMD produces

microprocessors that are specially used for information processing on the personal computers (CPU) and data processing for the graphics displays (GPU). Dell and Toshiba are major customers of AMD’s CUP and GPU.

Enterprise Embedded and Semi-Custom segments:

AMD also manufactures System-On-Chip (SOC), customized microprocessors, and server chips, which is the major computing unit for game consoles, enterprise

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 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 expenditure, AMD faces the disadvantages of relying on external companies for technical improvements in manufacturing. Revenue Decomposition Product segments AMD reports its revenue based on its product segments: 1) Computing and Graphics, 2) Enterprise, Embedded and Semi-Custom segments. The chart below (Figure 16) shows each business segment’s share of 2017 revenue. In aggregate, AMD’s had a $1.8 billion increase in its total revenue compared to 2016.

Figure 16 (Source: AMD 2017 10-K and enclosed model)

Computing and Graphics

In 2017, computing and graphics provided 57% of total revenue on the $3,029 million in sales5. The Central Processing Unit (CPU) for personal computers is the major part to AMD’s computing and graphics segments. Figure 17 indicates that the sales percentage growth in computing and graphics. AMD’s new CPU Ryzen series, launched in May 201711, contributed 54% sales growth in this segment. We believe that the computing and graphics will remain as the major revenue contributor in the future and stays strong as the personal computing device demands more processing power due to the emerging technology, such as digital mining, Artificial Intelligence, and machine learning.

Company Analysis

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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 contributed 43% of total revenue of $2,300 million in sales5. The Enterprise Embedded and Semi-Custom consists of Servers, Workstation CPUs, and Gaming consoles chips. As shown in Figure 4, this segment had increased 5% in sales amount in one year from 2015 to 2016. However, AMD’s Semi-Custom chips, such as Gaming consoles chips, are highly relied on Sony and Microsoft’s orders. AMD had the risk of losing major profit in this segment if one of its major customers leave in the future. On the other hand, AMD’s server CPU (EPYC series) successfully attracted Amazon as its major customer12. We estimated that the growth of sales in Enterprise, Embedded and Semi-Custom segment will increase and finally exceed the computing and graphics in the future.

Figure 18 (Source: AMD 2017 10-K and enclosed model) Region segments AMD generates its revenue from three major markets: Asian/Pacific, American, and Europe. It appears that Asia/Pacific region contributes the most sales to AMD’s total revenue with $4.3 billion in 2017. The following graph shows that, in 2017, AMD has 67.6% of total revenue from Asia/Pacific area, mainly from China and Japan, only 26.6% of total revenue was generated from the U.S. market. Meanwhile, sales had increased approximately 4% in the U.S. market while 5% of sales declined in Asia/Pacific region from 2016 to 2017. We expect that the sales continue to increase in the US market while the sales from Asia/Pacific still remain the main revenue stream for AMD.

Figure 19 (Source: FactSet ADM Region Revenue) Growth Analysis AMD has the following room to grow:

Product innovation Gross margin

The first and the most important fundamental factors for AMD to grow is the updates of its new products: 7nm CPU. The improved version AMD’s new CPU equipped with more computing power will be powerful enough to challenge Intel’s dominant position in the CPU market. The second factor that drives AMD’s growth is the improved margin. Historically, 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. We believe that the following characteristics of AMD’s new products will help the company compete with Intel and generate more than 20% sales’ growth in the Enterprise, Embedded and Semi-Custom segment. Outperforming the Intel’s products. AMD’s EPYC

processors demo outrun the industry standard, Intel’s Xeon series, with higher computing power and more compatibilities.

Double performance. The new product allows computers to compute two times faster than existing products on the market through its improved algorithm and architecture.

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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 20 (Source: AMD 2017 10-K and enclosed model) Gross margin In 2017, AMD broke its gross margin limit of 30% in past three years and reached to the highest point of 34.21%. AMD’s average growth rate in the gross margin from 2015 to 2017 was 6%, although due to inconsistent performance the five-year average rate is 0.2%. We forecast that AMD’s gross margin will grow from 35.56% in 2018 to 46.55% in 2026 based on AMD’s successful sales in personal central processing unit Ryzen series and Amazon’s contract with AMD of using EPYC chips in AWS cloud, which will increase AMD production volume; hence, reduce AMD’s accumulated production cost. Our gross margin in the forecasted period from 2018 to 2026 grow at a more stable long-term rate of 3%. The following chart (Figure 21) shows AMD’s historical and forecasted gross margin based on our model. AMD’s ability to grow gross margin is directly related to its ability to generate more sales and gain more market shares from Intel. However, our forecast was only based on the AMD’s historical performance and industry trend. Even after years of constant growth in the gross margin, AMD’s gross margin will reach 51.94%, 11% less than its competitor, Intel.

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 7nm14.

IBM is in 5nm game. While AMD and TSMC (Taiwan

Semiconductor Manufacturing Company) are embracing the excitement from the 7nm chips, in June 2017, IBM announced the world first 5nm chip15. More importantly, IBM cooperated with Samsung and Global Foundries in the development of 5nm chips.

AMD faces a high risk if Samsung or IBM innovate their Server Chips based on 5nm technology and introduce the more powerful products to cursh AMD’s 7nm server CPU and PC GPU.

No perpetual advantage for AMD. Even AMD

successfully launches its 7nm product and gains large portion of market share from Intel, the fundamental characteristics of the semiconductor industry, rapid technology change and production innovation, will put AMD in the high risk for losing its market shares to the rivals (e.g. Samsung), especially under the fact that Samsung and Intel have more capital expenditures in R&D than AMD has. We do not expect AMD to have perpetual advantage in the industry even after 7nm’s success.

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After analyses of the macro economy, the semiconductor industry, and AMD’s business, we have arrived a SELL rating for Advanced Micro Devices, Inc. (Ticker: AMD). By using multiple valuation models, we have achieved a result of the target price of $12.95 – $17.35. To calculate the intrinsic value for AMD, we implemented the Discounted Cash Flow Model (DCF), the Economic Profit Model (EP), and P/E relative valuation. We believe our DCF and EP models most accurately and reasonably reflect the intrinsic value of one share of AMD. The DDM and relative valuation is less appropriate because AMD does not pay dividends to the shareholders. Key Assumptions

Revenue Decomposition AMD has two major product segments: Computing & Graphics segment, and the Enterprise, Embedded & Semi-Custom segment. In 2017, AMD had 53.99% sales growth in Computing & Graphic, and a 0.22% decline in Enterprise, Embedded & Semi-Custom, which indicated that the total of 24.74% sales growth come from external customers. The following graph (Figure 22) shows our forecasted sales growth (%) from 2018 to 2026.

Figure 22 (Source: AMD 2017 10-K and enclosed mode) Computing & Graphics: The computing and Graphics segment has been providing the major revenue stream for the company. We forecast this segment continuing to expand in the coming years as AMD main source of revenue. AMD had launched its Ryzen generation CPU in April 2018, and we expect 15% of the sales growth in computing & graphics in 2018 and 12% in 2019. On the hand, we believe the PC market is slowly turning mature. Hence, for year 2020, 2021, 2022, 2023, 2024, 2025, 2026, 2027, we have forecasted 10.00%, 9.00%, 9.00%, 8.00%, 8.00%, 8.00%, 7.00%, and 7.00% comprehensive sales growth, respectively. After 2027, we estimated the constant growth of 4% in the computing & graphics industry as the industry average.

Enterprise, Embedded & Semi-Custom The Enterprise, Embedded & Semi-Custom severed approximately 43% of AMD’s total revenue in 2017. We expect a strong increasing of sales (24%) in this segment in 2018, due to AMD’s launch of 7nm server chip and the fact that Amazon has already equipped AMD’s chip in their server. However, we believe Intel’s10 nm server chips are still compatible to AMD’s 7nm, and the fact that other major players will push the same product after seeing AMD’s success in 7nm. Hence, we forecast a decreasing trend of growth in AMD’s sale under this segment. For year 2019, 2020, 2021, 2022, 2023, 2024, 2025, 2026, 2027, we have forecasted 18.00%, 14.00%, 12.00%, 10.00%, 9.00%, 8.00%, 8.00%, 8.00% and 7.00% comprehensive sales growth, respectively. After 2027, we estimated the constant growth of 4% in the Enterprise, Embedded & Semi-Custom segment. Cost of Sales Our cost of sales assumption in our first year (2018) is based on 5-years average as a percentage of net revenues. In 2018, we have received management guide on anticipated decline on cost as the production volume goes up. We anticipate that the cost of sales decreasing at a similar rate through the entirety of the forecasted periods as we expect the economies of scale continuing to develop for AMD. Research and Development Expenditures 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 revenues. We believe the same pattern will continue to exit through our forecasted periods. Therefore, we expect marketing, general and administrative development expenditures will maintain at 10% of the net revenues. Weighted Average Cost of Capital (WACC) Through the significant calculation and analysis, we found AMD have a WACC of 12.246%, based on their capital structure of 91.51% equity and 8.49% debt. We recognized AMD’s WACC is ranked at end for companies in the industry. However, we are confident that the discount rate is appreciate for AMD considering its past and future plan of ESOP. We do not anticipate the capital structure or WACC changing significantly in the long-term. Cost of Equity 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

Valuation Discussion

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yield on 10-year U.S. Treasury. We also used 4.99% as the market risk premium, which is forecasted by Aswath Damodaran16. AMD’s beta was calculated by Bloomberg terminal and was averaged from the raw monthly, weekly, annual betas for the past 5 to 10 years. This produced a beta of 1.98. We believe that the beta is reasonable for AMD since the industry is very volatile due to rapid technology change. Overall, under the CAPM method, AMD’s cost of equity was estimated is 12.246%.

Cost of Debt Based on AMD’s reporting on 2017’s 10-K, the market value for AMD’s debt is $1,700 million. We added the present value of AMD’s operating lease, which is $201 million. Therefore, the total market value for AMD’s debt is $1,901 million. We used a pretax cost of debt of 5.67%, which was calculated by the Bloomberg terminal and then added the average return rate of company’s 10 year corporate bond. After applying the marginal tax rate of 21.00%. We found that the after-tax cost is 4.55%. WACC Weights AMD’s market value of equity was calculated by taking current share price, which is $21.03 per share, multiplied by current shares outstanding $974.87 million shares outstanding), which 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 in the previous part. These numbers give us a weight of equity and a weight of debt equal to 91.51% and 9.49%, respectively. In total, AMD ends up with a WACC of approximately of 12.246%.

Valuation Models We believe that the DCF and EP models can best reflect our current perspective on AMD’s long term sustainability and adjust stock price of $14.99. The Discounted Cash Flow (DCF) is utilized by forecasting AMD’s cash flow and discounting them to the present value using our calculated WACC. Each year’s end free cash flow are calculated by subtracting that year’s capital expenditures from the current year’s net operating profit less adjusted taxes (NOPLAT). A continuing value formula is applied to the CV year to determine the present value of company’s cash flow in perpetuity. The EP model is built to calculate the difference between each year’s return on invested capital (ROIC) and WACC, and multiplies the current year’s beginning invested Capital (Beg. IC) to arrive the amount of the current year’s EP. Contusing value formula is used to calculate the present value of company’s EP in propensity. In both the Discounted Cash Flow and the Economic Profit model, we have forecasted AMD’s cash flow to the year of 2027, for which we applied our CV growth rate of NOPLAT of 4.00%. This will be the rate that we anticipate AMD to grow their revenue at each year until reaching a steady-state of growth that close to real GDP growth.

Under both models, we have calculated an intrinsic value of $14.99 for one share of AMD. We are confident that our price accurately represent the value of AMD at the present day; therefore, focus should remain primarily on our DCF and EP models. Dividend Discount Model AMD does not currently pay any dividend to shareholders, and the company will not pay the dividend in the foreseeable future. Therefore, we do not believe our DDM model carries less when evaluating our analysis. In order to find our value under this model, we applied CV P/E multiple which yields the inartistic value of $10.93 per share. To emphasize the point, we believe DDM does not offer us an accurate representation of the value of AMD. Relative P/E Valuation Our relative valuation model values six companies that are in the same industry as AMD. The six companies are Micron Technology, Inc. (Ticker: MU), NXP Semiconductors N.V. (Ticker: NXPI), QUALCOMM Incorporated (Ticker: QCOM), Intel Corporation (Ticker: INTC), Applied Materials, Inc. (Ticker: AMAT), and Taiwan Semiconductor Manufacturing Company Limited (Ticker: TSM), respectively. The model yields the average P/E values of $2.38 and $3.91 per share for year 2018 and 2019, respectively. We do not believe the model gives a represent value for AMD whatsoever. One reason is that only 23% of AMD’s total revenue is generated in 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. 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 than other industries. AMD’s launch on 7nm will be the potential game changer for the market. For those reasons, AMD should trade higher than the price from relative P/E valuation. We performed the sensitivity test in order to provide clarity on how AMD’s stock price can change when giving changes in main assumptions held in the model. Those assumptions present the changes in AMD’s margin, growth, and the revenue stream. Risk-Free Rate vs. Market Risk The risk-free rate and market risk are important factors used to calculate AMD’s WACC, which can have significant impact on the company’s stock price. The increase in risk-free rate alone can cause a $0.32 - $2.61 decline in the per share price, which indicates the significant effects the risk-free rate will bring to AMD’s stock in the near future. The increase in market risk premium can have much serious impact on AMD’s stock, which causes a $2.5 – $ 9.35 decline in the share price. COGS vs. R&D expenditure AMD’s most significant operating expense is the cost of goods sold (COGS), which makes up close to 62% of the sales each year, on the historical average. In our forecasted period, we 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

Sensitivity Analysis

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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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1 Advanced Micro Devices Inc. (n.d.). Retrieved from https://www.bloomberg.com/quote/AMD:US 2 United States GDP Growth Rate 1947-2018 | Data | Chart | Calendar. (n.d.). Retrieved from https://tradingeconomics.com/united-states/gdp-growth 3 FactSet Research Systems. (n.d.). ADVANCED MICRO DEVICES, INC: Snapshots. Retrieved from FactSet database https://company-security.apps.factset.com/snapshot/AMD-US 4 The Industry Handbook: The Semiconductor Industry. (2017, March 30). Retrieved from https://www.investopedia.com/features/industryhandbook/semiconductor.asp 5 FactSet Research Systems. (n.d.). United States Semiconductor Industry: Snapshots. Retrieved from FactSet database https://industry.apps.factset.com/snapshot/FI1305US 6 Semiconductor Research Policy | SIA. (n.d.). Retrieved from https://www.semiconductors.org/policies/research/ 7 Impact of the Semiconductor Industry. (n.d.). Retrieved from https://www.semiconductors.org/semiconductors-101/industry-impact/ 8 Global Semiconductor & Electronic Parts Manufacturing Reports. (2018). Retrieved from https://clients1.ibisworld.com/reports/gl/industry/productsandmarkets.aspx?entid=960 9 Worldwide Semiconductor Sales Chart. (n.d.). Retrieved from https://ycharts.com/indicators/semiconductor_billings/chart/#/?securities=id:I:WSS,include:true,,&calcs=&correlations=&zoom=5&startDate=&endDate=&format=real&recessions=false&chartView=&chartType=interactive&splitType=single&scaleType=linear&securitylistName=&securitylistSecurityId=&securityGroup=&displayTicker=false&title=&note=&units=false&source=false&liveData=false&quoteLegend=true&legendOnChart=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

s-7nm-zen-2-will-worry-intel-by-doubling-cpu-core-counts/#62f506ce4e43 14 About Intel’s 10nm Process Lead. Retrieved from https://wccftech.com/analysis-about-intels-10nm-process/ 15 IBM unveils world’s first 5nm chip. Retrieved from https://arstechnica.com/gadgets/2017/06/ibm-5nm-chip/?comments=1 16 Damodaran Online. (n.d.). Retrieved from http://pages.stern.nyu.edu/~adamodar/ Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

References

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Advanced Micro Devices, Inc.Revenue DecompositionIn MillionsFiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CVNet 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-Custom

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

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 regionsUnited 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 RegionsUnited 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 SegmentsComputing & 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 7,391.88Enterprise, Embedded & Semi-Custom

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

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 SegmentsComputing & 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 StatementIn MillionsFiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CVNet 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 shareBasic (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 calculationBasic 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 SheetIn MiilionsFiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CVAssetsCurrent 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 1,511.58Inventories, 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 2,195.40Prepayments & other receivables 33.00 32.00 33.00 39.28 50.95 59.22 67.67 75.94 85.65 94.87 99.73 101.88 118.05Prepaid expenses & other current assets 43.00 63.00 77.00 89.96 102.62 114.35 125.41 136.11 146.68 159.66 169.53 183.64 200.10Other 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 18,434.10Long-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' EquityCurrent 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' EquityCommon 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 4,277.08Accumulated 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 StatementIn MillionsFiscal Years Ending Dec. 30 2015 2016 2017Cash flows from operating activitiesNet 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 StatementIn MillionsFiscal Years Ending Dec. 30 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CVCASH 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 StatementPercent of SalesFiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CVNet 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 SheetPercent of SalesFiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CVAssetsCurrent 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' EquityCurrent 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' EquityCommon 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 EstimationIn MilionsFiscal Years Ending Dec. 30 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027CVNOPLAT

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 TaxesMarginal 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 TaxesEnding 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 LiabilitiesDeferred 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

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

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

Cost of EquityBeta (5Y WK) 1.98Risk-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 EquityShare Price $21.03Shares Outstanding (in Million) 974.87Market 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 ModelFree 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 16422.74Excess Cash (14.62%) 779.10Joint Ventures 59.00Long term Investment 58.00-PV operating lease 201-Total Debt 1901.41-ESOP 2614.36Value of Equity 12,601.66$

Shares Outstanding 974.87

Intrinsic Value of Equity 12.93$

EP ModelNOPLAT 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 2344.38Continuing Value 29634.55Present 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 16422.74Excess Cash (14.62%) 779.10Joint Ventures 59.00Long term Investment 58.00-PV operating lease 201-Total Debt 1901.41-ESOP 2614.36Value 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 11/10/2018Next FYE 12/31/2018Last FYE 12/31/2017Days in FY 365 Days to FYE 314 Elapsed Fraction 0.860Adjusted Target Price 14.99$

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

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Advanced Micro Devices, Inc.Relative Valuation Models

EPS EPSTicker Company Price 2018E 2019E P/E 18 P/E 19MU 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

TSMTaiwan Semiconductor Manufacturing Company Limited

$38.07 $2.27 $2.47 16.77 15.41

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$

Page | 26

Advanced Micro Devices, Inc.Key Management Ratios

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

Liquidity RatiosCurrent 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 4.63Quick 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 4.08Cash 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 3.50Payables Turnover

Activity or Asset-Management RatiosInventory 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 3.15Inventory Period 87.85 85.58 78.66 82.42 85.88 89.16 96.76 101.41 101.12 106.01 107.47 111.55 118.09Asset 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 RatiosDebt 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 0.22Debt 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 0.14Debt 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 RatiosGross 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 RatiosPayout Ratio 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

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Structual assumption

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 14.584.90% 17.03 16.70 16.37 16.06 15.51 15.45 15.15 14.87 14.59 14.314.95% 16.70 16.38 16.06 15.75 15.22 15.16 14.87 14.59 14.32 14.054.99% 16.45 16.13 15.82 15.52 14.99 14.93 14.65 14.37 14.11 13.845.50% 13.58 13.33 13.08 12.84 12.42 12.38 12.15 11.93 11.72 11.506.00% 11.33 11.13 10.93 10.74 10.39 10.36 10.17 9.99 9.81 9.646.50% 9.50 9.33 9.17 9.01 8.72 8.69 8.54 8.39 8.24 8.107.00% 7.99 7.85 7.71 7.57 7.33 7.31 7.18 7.05 6.93 6.80

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 8.993.50% 23.04 20.56 18.42 16.57 14.94 13.51 12.24 11.11 10.09 9.173.75% 23.87 21.24 18.99 17.05 15.35 13.86 12.54 11.37 10.31 9.374.00% 24.77 21.98 19.60 17.56 15.78 14.23 12.85 11.64 10.55 9.574.25% 25.75 22.78 20.26 18.10 16.24 14.61 13.19 11.92 10.80 9.794.50% 26.82 23.64 20.96 18.69 16.73 15.03 13.54 12.22 11.06 10.014.75% 27.98 24.57 21.73 19.31 17.25 15.47 13.91 12.54 11.33 10.255.00% 29.27 25.59 22.55 19.99 17.81 15.94 14.31 12.88 11.62 10.50

$ 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 3.3420.00% 23.83 21.50 19.18 16.85 14.99 12.19 9.86 7.51 5.15 2.7320.50% 23.25 20.93 18.60 16.27 14.41 11.61 9.28 6.93 4.56 2.1021.10% 22.56 20.24 17.91 15.58 13.72 10.92 8.58 6.23 3.84 1.3121.50% 22.10 19.78 17.45 15.12 13.26 10.46 8.12 5.76 3.36 0.7322.00% 21.53 19.20 16.87 14.55 12.68 9.88 7.53 5.17 2.75 -0.1222.50% 20.95 18.63 16.30 13.97 12.10 9.30 6.95 4.58 2.12 -1.5622.90% 20.49 18.16 15.84 13.51 11.64 8.84 6.48 4.10 1.61 -16.76

R&D Margin

Market Risk Premium

Risk-free rate

CV Growth

WACC

COGS

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$ 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 22.6157.50% 18.45 18.62 18.80 18.99 19.18 19.37 19.57 19.77 19.98 20.2060.00% 16.18 16.34 16.51 16.68 16.85 17.03 17.21 17.40 17.59 17.7962.00% 14.36 14.51 14.67 14.83 14.99 15.15 15.32 15.50 15.68 15.8665.00% 11.64 11.77 11.91 12.05 12.19 12.34 12.49 12.64 12.80 12.9767.50% 9.36 9.48 9.60 9.73 9.86 9.99 10.12 10.26 10.40 10.5570.00% 7.07 7.18 7.29 7.40 7.51 7.63 7.75 7.87 8.00 8.1372.50% 4.76 4.86 4.95 5.05 5.15 5.25 5.36 5.47 5.58 5.69

$ 14.99 1.78 1.83 1.88 1.93 1.98 2.04 2.09 2.14 2.19 2.2418.50% 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 12.7919.50% 18.86 17.96 17.11 16.31 15.57 14.72 14.06 13.44 12.85 12.29

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 11.2921.00% 16.90 16.06 15.27 14.53 13.84 13.05 12.44 11.86 11.31 10.7921.50% 16.25 15.43 14.66 13.94 13.26 12.49 11.90 11.33 10.80 10.2922.00% 15.59 14.79 14.05 13.34 12.68 11.94 11.36 10.81 10.28 9.79

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 12.843.50% 15.55 15.26 14.98 14.70 14.22 14.16 13.90 13.65 13.40 13.163.75% 15.99 15.68 15.39 15.10 14.59 14.54 14.27 14.00 13.74 13.494.00% 16.45 16.13 15.82 15.52 14.99 14.93 14.65 14.37 14.11 13.844.25% 16.93 16.60 16.28 15.96 15.41 15.35 15.06 14.77 14.49 14.224.50% 17.46 17.11 16.77 16.44 15.86 15.80 15.49 15.19 14.90 14.614.75% 18.02 17.65 17.29 16.94 16.34 16.27 15.95 15.64 15.33 15.035.00% 18.62 18.23 17.86 17.49 16.85 16.78 16.45 16.12 15.79 15.48

CV Growth of NOPLAT

COGS

R&D Expendit

ure

Beta

Risk-free rate

CV Growth

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Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 146,000,000Average Time to Maturity (years): 3.02Expected 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 2027CVIncrease in Shares Outstanding: 48,273,207 48,273,207 48,273,207 965,464 0 0 0 0 0 0Average 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 15,000,000Expected 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 1,093,124,016Plus: Shares Issued Through ESOP 48,273,207 48,273,207 48,273,207 965,464 0 0 0 0 0 0Less: 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 InfoTicker Symbol AMDCurrent Share Price $21.03Current Model Date 11/10/2018FY End (month/day) Dec. 30Intrinsic Value of Equity 14.99$

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

Operating assumptionsRev 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 AMDCurrent Stock Price $21.03Risk Free Rate 3.08%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 38.80%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 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 OperatingFiscal Years Ending Dec. 30 Leases Fiscal Years Ending Dec. 30 Leases Fiscal Years Ending Leases2018 40 2017 49 2016 512019 35 2018 51 2017 502020 31 2019 46 2018 452021 29 2020 43 2019 282022 28 2021 64 2020 26Thereafter 92 Thereafter 135 Thereafter 106Total Minimum Payments 255 Total Minimum Payments 388 Total Minimum Payments 306Less: Interest 54 Less: Interest 81 Less: Interest 63PV 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 LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 40 37.8 1 49 46.3 1 51 48.22 35 31.3 2 51 45.6 2 50 44.73 31 26.2 3 46 38.9 3 45 38.04 29 23.2 4 43 34.4 4 28 22.45 28 21.2 5 64 48.4 5 26 19.76 & beyond 28 61.7 6 & beyond 64 93.6 6 & beyond 26 69.6PV 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 OperatingFiscal Years Ending Leases Fiscal Years Ending Leases2015 50 2014 592016 46 2015 512017 43 2016 432018 41 2017 402019 27 2018 39Thereafter 133 Thereafter 156Total Minimum Payments 340 Total Minimum Payments 388Less: Interest 77 Less: Interest 86PV 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 LeaseYear Commitment Payment Year Commitment Payment1 50 47.3 1 59 55.82 46 41.1 2 51 45.63 43 36.3 3 43 36.34 41 32.8 4 40 32.05 27 20.4 5 39 29.56 & beyond 27 85.4 6 & beyond 39 102.7PV of Minimum Payments 263.3 PV of Minimum Payments 301.9