Don't Bet AMD Stock Can Rise On $400 Billion AI Chip Market – Forbes

LAS VEGAS, NEVADA – JANUARY 04: AMD Chair and CEO Dr. Lisa Su displays an ADM Instinct M1300 chip … [+] as she delivers a keynote address at CES 2023 at The Venetian Las Vegas on January 04, 2023 in Las Vegas, Nevada. CES, the world’s largest annual consumer technology trade show, runs from January 5-8 and features about 3,100 exhibitors showing off their latest products and services to more than 100,000 attendees. (Photo by David Becker/Getty Images)
AMD stock — trading 10% below its November 2021 high — is about 7% overvalued, according to CNN Business. I do not see that as a buying opportunity.
To be fair, AMD stock — 9.3% of its float being sold short, according to the Wall Street Journal — is up 119% so far in 2023.
There is much to like about the company. For decades, after competing with limited success against Intel in the personal computer and server markets, AMD stock had dropped to around $2 a share after cutting 25% of the chipmaker’s staff,” according to Fast Company.
A decade later, its chip innovations for smartphones and tablets enabled AMD to become Intel’s INTC leading challenger. AMD’s smart design decisions coupled with Intel’s “technological stumbles” left AMD with four times its 2017 revenue in December 2023 – during the same period, Intel’s business shrank by 16%, the Wall Street Journal reported.
After AMD’s tremendous rise this year, investors are overestimating how much the company will grow — largely due to hopes for its challenge to Nvidia’s supremacy in the market for Graphics Processing Units used to power Generative AI.
I see two reasons not to bet on AMD stock:

In June, AMD announced an AI chip to challenge Nvidia’s 80% share of the GPU market. AMD said its MI300X GPU would start shipping in the third quarter of 2023 and the company would ramp up mass production by the end of 2023, Fast Company noted.
AMD CEO Lisa Su called MI300X “the world’s most advanced accelerator for generative AI” and claimed AI would become the company’s “most significant and strategically important long-term growth opportunity,” wrote Fast Company.
Will Su realize her hopes for AMD’s AI chip?
Despite excitement about AMD’s challenge, it has a long way to go to catch up with Nvidia.
In early December 2023, AMD had lost ground to Nvidia – as its data-center revenue fell 6% from the previous year. In hopes of reigniting growth in this business, Su told investors AMD would generate $2 billion in GPU revenue in 2024, according to the Journal.
While this projection represented a significant improvement — 20% of Wall Street’s $10 billion forecast for AMD’s 2024 data center revenue — the $2 billion was a pittance compared to Nvidia’s projected $76 billion in 2024 data center revenue, the Journal noted.
Given the strong industry demand for GPUs, AMD is trying to position itself to provide the chips Nvidia cannot supply. AMD’s strategy for Generative AI hinges on selling a better performing GPU, expressions of interest in the chip from large customers, and a proprietary software platform.
AMD claims its AI chip will outperform Nvidia’s flagship H100. Moreover, in December 2023, AWS, OpenAI, and Microsoft MSFT expressed interest in incorporating AMD’s MI300 chip into their Generative AI workflows, noted the Financial Times.
AMD was confident in the competitiveness of its AI chips – especially for large language model inference (a chatbot’s responses to user prompts). The MI300 “is definitely going to be competitive from training workloads, and in the AI market, there’s no one-size-fits-all as it relates to chips,” Su told The Verge in a September 2023 interview.
“What we’ve done with MI300 is we’ve built an exceptional product for inference, especially large language model inference,” Su added. “So when we look going forward, much of what work is done right now is companies training and deciding what their models are going to be. But going forward, we actually think inference is going to be a larger market, and that plays well into some of what we’ve designed MI300 for.”
In December 2023, AMD debuted its ROCm 6 software platform – aiming to compete with Nvidia’s proprietary Cuda platform. “Software actually is what drives adoption,” Su told the Financial Times.
AMD indicated several large potential customers were interested in the MI300, including the following:

Analysts disagreed on AMD’s prospects for mounting a strong challenge to Nvidia.
Following a December 6 AMD investor conference, 0ne analyst expressed optimism about AMD’s ability to compete with Nvidia. Deutsche Bank’s Ross Seymore wrote in a note, “We believe that today’s event highlighted how AMD remains extremely well positioned to take advantage of the rapidly expanding AI TAM, as they continue to stack up customer partnerships and roll out products with impressive (and extremely competitive) performance metrics,” CNBC reported.
By contrast, Morningstar MORN expressed greater skepticism about AMD’s prospects. The analyst argued AMD was far behind Nvidia in its software – thus holding the challenger back even if AMD’s GPU designs were “up to par (or better).”
Meanwhile, AMD faces competition from Generative AI cloud services providers building their own GPUs. “Google’s GOOG TPUs and Amazon’s AMZN Trainium and Inferentia chips were designed with AI workloads in mind, while Microsoft and Meta Platforms META have announced semiconductor design plans,” noted Morningstar.
To keep its stock price growing faster, AMD must beat investors’ expectations for growth and raise guidance quarter after quarter.
High investor expectations make this task more difficult.
One analyst is very optimistic about growth in AMD’s data center business – the unit housing the company’s AI accelerator products. It’s a market that AMD expects to reach $400 billion by 2027, according to CNBC.
Anticipating 30% average annual growth, Morningstar envisions AMD’s data center revenue will reach $10 billion in 2024 and top $22 billion by 2027.
Can AMD grow its data center revenues as fast as the analyst forecasts? AMD bulls argue Nvidia will leave enough breadcrumbs for AMD to enjoy very significant GPU revenue while bears expect AMD’s subpar software to keep it from gaining much ground on Nvidia’s Cuda, Morningstar noted.
On December 20, AMD stock looked overvalued. Analysts’ median 12-month price target for the company is $130 a share according to 46 analysts – 7% below the chipmaker’s December 19 price of about $140, according to CNN Business.
While many things could change, for now, AMD is not the most compelling stock for investors to tap the fast-growing demand for AI chips.

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