How High Will AMD Stock Go?

With a 93.6% gain in the last three months, AMD is one of the market’s hottest stocks at the moment. The semiconductor manufacturer, long seen as a potential rival to NVIDIA, has been on a tear as the market continues to bid its stock up to ever greater heights.

Though AMD is already a major central processing unit (CPU) and graphics processing unit (GPU) manufacturer, much of its recent price action has been the result of projected earnings growth due to its growing presence in the AI chip market. Is AMD a buy at its current prices, or has the market driven shares too high for investors to find appealing?

What’s Powering AMD Shares?

The biggest catalyst for AMD in recent months has been the announcement of its new MI300 chip line, designed specifically with large language model training in mind.

With significant memory and rapid processing power, the MI300 line is purpose built for AI and exceeds the storage of NVIDIA’s flagship H100 units.

AMD has also turned in respectable business performance over the last year even without the tailwinds of the new chips showing up in its results yet.

In Q3, the company reported 4% year-over-year revenue growth to $5.8 billion, including an 8% quarter-over-quarter improvement as revenue had slumped for the company in early 2023.

Much more important than revenue, however, was the surge in net income AMD saw during the quarter. It reached $299 million versus $66 million in the year-ago quarter.

Similar to revenues, earnings had dropped off during the early months of 2023 and, as a result, net income growth stood at 353% year-over-year and 1,007% quarter-over-quarter.

Management expects to see about $6.1 billion in Q4 revenues, resulting in 9% year-over-year growth. The top line is expected to rise about 17.7% in the coming 12 months as the company continues to sell into a burgeoning market for AI chips and data center processors.

AMD’s Competitive Moves Against NVIDIA Are Beginning to Bear Fruit

Although NVIDIA remains the biggest player in AI chips, AMD’s new hardware has generated interest from major tech companies investing in generative AI. Microsoft, Meta and OpenAI have all announced that they will be using the MI300 units in their cloud computing and AI operations.

AMD is also tentatively planning to emulate NVIDIA and Intel by creating AI chips specific to the Chinese market. Given the strict export controls now in place, American semiconductor manufacturers cannot sell advanced chips into the world’s second-largest economy.

With ample room for growth in China, there is a good chance that AMD could increase its own revenues by selling downgraded versions of the MI300 that comply with current trade regulations.

Better Prospects, But Higher Valuations

In light of AMD’s recent successes, it’s unsurprising that the market is pricing the stock higher.

AMD’s valuation, however, may have run up too far for its own good. Shares currently trade at 92.9x forward earnings and an equally worrying 4.5x projected earnings growth.

These record prices introduce considerable risks of correction for investors. Until recently, AMD was the more reasonably priced option between itself and NVIDIA.

Following the radical spike in AMD shares, though, this balance has flipped. NVIDIA currently trades at 55.4x forward earnings and 4.0x its expected growth.

While few would argue that these high ratios make NVIDIA a value bargain, AMD is, by most standards, now more expensive than its more dominant competitor.

AMD’s Business Is Attractive but Also Risky

Despite business improvements over the last year, AMD still has a somewhat fragile competitive position against Intel and NVIDIA.

In the CPU market, Intel still leads with a 61% market share versus AMD’s 36%. In GPUs, NVIDIA commands over 80% of the market. Even though the MI300 could help AMD grab additional market share going forward, it is clear that it will take time to breach NVIDIA’s moat.

Software could also remain a problem for AMD, even if the MI300 proves superior to NVIDIA’s equivalent hardware. While NVIDIA has years of experience creating software platforms for cutting-edge AI purposes, AMD is relatively new to this part of the chip game. As such, NVIDIA could still have a competitive edge for end users for some time in spite of AMD’s technological leaps.

Separate from the questions of AMD’s growth within the AI chip market is the future of that market itself. While generative AI is promising for certain tasks, there remains a gigantic gulf between the hype around the technology and its real-world use.

As an example of this disparity, consider that roughly half of S&P 500 companies mentioned artificial intelligence in last year’s earnings reports, but fewer than 5% of all American businesses report actually using AI in day-to-day operations.

Although bulls believe AI hype could power the market for years to come, there is also the possibility of an AI market bubble led by heavily overvalued mega-cap tech stocks.

More bearish voices point out that AI will eventually have to be justified by translating to real productivity and earnings gains, or 2024 could see a reversal of the gains established in 2023.

How High Will AMD Stock Go?

Analysts forecast a median 12-month price target of $160 per share which would result in a decline of about 11.5% in the coming year.

Following its recent run-up, AMD looks to be very expensive. Even with annual earnings growth of nearly 35% expected over the next five years, the stock’s recent run seems to have taken it well beyond what its current performance can support.

Nevertheless, it’s difficult to rule out the possibility that AMD could go higher this year. AI hype has caused several stocks to defy conventional market gravity, and investors appear willing to continue buying shares at valuations that would be considered extreme under most normal circumstances. It seems that AMD is in a position to mount at least a credible challenge to NVIDIA, and so there is considerable room for the company to grow from here.

Ultimately, AMD’s status depends on your outlook. For value investors and those with conservative risk tolerances, the stock is likely a hold. Growth-oriented investors who are comfortable with risk, however, may consider taking out small positions in the stock. While significantly risky, AMD could move higher in the coming years, especially as the Fed begins to cut interest rates.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.