Ahead of Xilinx Deal’s Close, the Outsized Growth Comes at a Price

With the necessary approvals now in place, the Advanced Micro Devices (AMD/Xilinx deal will most likely close this week. However, Raymond James’ Chris Caso notes that due to AMD’s continued success since the deal’s announcement, its consumption comes with a price.

“At the time the deal was announced in October 2020, AMD expected the transaction to be immediately accretive to EPS, margins, and cash flow,” noted the 5-star analyst. “Since then, however, AMD earnings have grown at a significantly greater rate than Xilinx’s earnings. Therefore, as compared to October 2020, our analysis now shows that the dilution from core AMD earnings (which will be divided by a higher share count following the deal) exceeds the accretion from adding Xilinx earnings (which has grown at a slower rate vs. AMD).”

As such, bringing Xilinx under the fold will be “accretive” to margins and cash flow, but non-GAAP EPS will take a hit. Assuming there are hardly any near-term cost synergies, 2022 earnings will see dilution of roughly $0.43 (around 11%), and once synergies are captured in 2023, there will be $0.39 of annual EPS dilution (about 8%).

Although this differs from expectations at the time of the deal’s announcement, it does little to alter the big picture and ultimately shows the pace at which AMD is growing.

As such, Caso considers the issue a “very minor factor in his AMD thesis, and much less impactful than the dynamic of share gains and fundamental growth in their datacenter segment.” Over the next several years, the analyst expects the company to keep on delivering “impressive share gains,” based on a strong roadmap and the “technology lead” the company now has over Intel.

So, it’s a vote of confidence from Caso, who maintains an Outperform (ie, Buy) rating on AMD, and backs its up with a $160 price target. Should his thesis prove correct, investors are looking at one-year returns of 38%. (To watch Caso’s track record, click here

What does the rest of the Street make of AMD’s prospects? Based on 14 Buys vs. 9 Holds, the stock boasts a Moderate Buy consensus rating. The average price target comes in just under Caso’s objective; at $156.95, the figure suggests share appreciation of ~35% in the year ahead. †See AMD stock analysis on TipRanks

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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