AMD Is Doubling Down On AI Chips. Should You Buy Or Avoid The Stock?

Advanced Micro Devices stock (NASDAQ: AMD) has gained a solid 71% year-to-date, considerably outperforming the broader S&P 500 which remains up by 14% over the same period. So what’s driving the recent surge in the stock? Technology stocks, in general, have fared well this year, with inflation easing and the Federal Reserve moderating the pace of its interest rate hikes. Moreover, following the launch of OpenAI’s surprisingly competent generative AI tool ChatGPT, major tech players appear to be doubling down on the artificial intelligence space. This has apparently turned investor attention back to companies that make graphics processing units which are becoming the de-facto chips for running AI-related workloads. While AMD’s GPUs have typically been used more for gaming and professional applications compared to Nvdia’s chips, which are the go-to GPUs for accelerated computing applications, AMD is also now focusing on winning over the AI market. Last week the company unveiled the MI300X chip which is targeted specifically at large language model training and inference for generative AI workloads. The company expects to begin offering the technology for customers to try in Q3 2023, with production slated to ramp up from 2024.  The company estimates that the total addressable market for data center AI accelerators will approach $150 billion by 2027, from roughly $30 billion this year.

Now, should you buy or fear AMD stock at the current market price of about $111 per share? While there are a couple of tailwinds for the stock, we think AMD’s valuation at the current juncture appears a bit rich. AMD stock trades at about 8x sales, well ahead of the broader market. Moreover, although the company has seen robust growth (52% on average, over the last three years) driven by strong PC demand through the Covid-19 pandemic and a growing uptake of data center chips by cloud players, revenues are poised to contract this year as demand cools off. AMD’s operating margins have also contracted considerably to -3% over the most recent quarter, compared to about 16% in the year-ago period. AMD stock is also somewhat less resilient to downturns, as the stock has seen bigger drawdowns compared to the broader market over both the 2008 recession as well as the 2020 Covid-19 recession. We estimate AMD valuation at about $84 per share, which is 24% below the current market price. See our analysis on Buy Or Fear Advanced Micro Devices (AMD) Stock? for more details about what is driving the stock.

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[1] Month-to-date and year-to-date as of 6/23/2023
[2] Cumulative total returns since the end of 2016

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