Balance sheet items
Previously, we saw that Advanced Micro Devices (AMD) missed its outlook of returning to positive FCF (free cash flow) in 2018 largely because of high inventory and accounts receivables. These two balance sheet items show how AMD was impacted by the crypto bubble burst and its transition to next-generation products. We will look at both these items individually.
AMD’s inventory rose 14.5% sequentially and YoY to $845 million at the end of 2018 as the company ramped up new products. The higher inventory shows the company’s transition to next-generation 7-nm (nanometer) products. AMD expects the inventory levels to return to a normal level in the second quarter of 2019 as the new products hit the market. The last time AMD’s inventory rose above 10% YoY was at the end of 2016 as it transitioned to 14-nm products.
On the other hand, NVIDIA’s (NVDA) inventory rose 78% YoY to $1.4 billion at the end of October 2018 as it ramped its next-generation Turing GPU architecture, which was hit by slow adoption. A similar situation happened in January 2016 when NVIDIA increased its inventory by 90% YoY as it ramped its Pascal GPU architecture.
Both NVIDIA’s and AMD’s inventory was flat or down YoY at the end of 2017 as the unexpected surge in demand from crypto miners created a GPU supply shortage. This crypto bubble burst in the second quarter of 2018 and affected the accounts receivable of AMD.
AMD’s accounts receivable
AMD’s accounts receivable rose 208% YoY to $1.23 billion, and as a result, its FCF fell 91% YoY to $29 billion at the end of 2018. This high level of receivables likely reflects the excess GPU inventory in the channel. NVIDIA’s receivables also rose 89.6% YoY in the fiscal 2019 third quarter, which ended in October 2018. If AMD’s receivables were at their normal level of $400 million to $500 million, the company would have reported positive FCF of $600 million in 2018.
Next, we’ll look at AMD’s leverage and what it says about the company’s long-term financial position.
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