Analysts Are All-in on Nvidia's Biggest AI Chip Rival

Artificial intelligence (AI) is reshaping industries, fueling innovation, and transforming business dynamics. At the forefront of this revolution is the semiconductor industry, which is crucial for supplying specialized chips that meet AI’s demanding computational and data processing requirements.

While Nvidia (NVDA) has dominated with its AI accelerators, boasting a significant market share, Advanced Micro Devices (AMD) is a formidable challenger. Once an underdog, AMD now flexes its muscle with AI chips like the MI300 Instinct GPUs, surpassing Nvidia’s offerings in memory capacity and bandwidth while remaining cost-effective. AMD’s strategic acquisitions and relentless focus on AI chip innovation underscore its growing influence in the competitive AI landscape.

AMD is getting bullish nods lately from brokerage firms RothMKM, Wells Fargo, and Melius Research, among others, which expect the chip stock to keep rising. As semiconductor stocks pull back from their recent highs today amid rising geopolitical concerns, AMD's surging influence in the AI chip market warrants a closer look.

About AMD Stock

Incorporated in 1969 as a Silicon Valley start-up, Santa Clara-based Advanced Micro Devices (AMD) has grown into a leading semiconductor firm, boasting a market cap of $286.9 billion. AMD shapes the data center, embedded, gaming, and PC markets, and is renowned for pioneering advancements in CPUs and GPUs - notably with its Ryzen processors and Radeon graphics cards. Trusted globally by Fortune 500 enterprises and research institutions, AMD's technology enhances daily life, work, and play experiences, solidifying its position as a major player in the semiconductor industry.

The stock is now down 28.4% from its all-time March peak at $227.30, and shares of AMD are up about 10.4% on a YTD basis. Over the past 52 weeks, the stock has soared 37.5%, overshadowing the broader S&P 500 Index’s ($SPX) 23.6% gains and the S&P Semiconductor SPDR’s (XSD) 13.2% returns during this time frame.

From a valuation standpoint, AMD offers compelling value relative to its peers in the mega-cap AI chip space. The stock trades at 50 times forward adjusted earnings, which is in line with rivals like Nvidia and Broadcom (AVGO). However, AMD’s price/sales multiple of 11.2x is a healthy discount to both NVDA and AVGO, making AMD an attractive pick in the competitive semiconductor market. 

AMD Slides After Q1 Earnings Beat

After unveiling its Q1 earnings results after the close on April 30, shares of Advanced Micro Devices plummeted 8.9% in the subsequent trading session. Despite marginally exceeding projections on both revenue and EPS, the chip giant’s lackluster fiscal Q2 guidance failed to excite investors. AMD’s revenue rose 2.2% annually to $5.5 billion, with adjusted EPS up 3.3% to $0.62.

Strong performance in the Data Center and Client segments, with 80% and 85% revenue growth, respectively, was bolstered by MI300 AI accelerators and Ryzen/EPYC processors. However, Gaming segment revenue fell 48% due to lower console and PC chip sales.

AMD is expected to announce its fiscal Q2 earnings on Aug. 6. Management projects revenue of about $5.7 billion, with a margin of plus or minus $300 million. Anticipating 6% annual and 4% sequential growth, AMD aims for a non-GAAP gross margin of around 53%. Analysts tracking Advanced Micro Devices expect its Q2 EPS to grow 17.5% to $0.47.

Over the longer term, the company’s profit is projected to reach $2.60 per share in fiscal 2024, up 30.6% year over year, and rise another 68.5% to $4.38 per share in fiscal 2025.

AMD's AI Expansion Challenges Nvidia

At June’s Computex 2024, AMD unveiled the MI325X AI accelerator, boasting 288GB of HBM3E memory to challenge Nvidia's dominance. In partnership with Microsoft (MSFT), Meta Platforms (META), Dell Technologies (DELL), Hewlett Packard Enterprise (HPE), and Lenovo (LNVGY), AMD’s Instinct MI300X accelerators aim to gain traction in AI markets, bolstering its competitive edge.

Plus, AMD is set to acquire Finnish AI startup Silo AI for $665 million in cash. Developing robust AI models remains a challenge, prompting AMD's move to leverage Silo AI's expertise for enhanced model development and deployment. This acquisition strengthens AMD's software capabilities, and marks AMD's latest effort to expand its AI presence, following previous acquisitions of Mipsology and Nod.ai and over $125 million invested in various AI firms in the past year.

What Do Analysts Expect For Advanced Micro Devices Stock?

On July 11, RothMKM and Wells Fargo both boosted their AMD price targets post-Silo AI acquisition. RothMKM analyst Sujeeva De Silva sees the acquisition bridging the gap with top AI frameworks, like Nvidia’s. De Silva raised AMD's price target to $200 from $180, and maintained a “Buy” rating, citing enhanced software prowess and stronger AI processor traction.

Wells Fargo's Aaron Rakers views the acquisition as strategically deepening AMD's open-source AI software expertise, emphasizing its ecosystem focus. He lifted his target to $205 while retaining an “Overweight” rating on AMD, citing positive strategic implications despite minimal engagement with Nvidia's GPUs by Silo AI.

Also on July 11, Melius Research analyst Ben Reitzes said that there’s more room for the stock to grow. While he says the Silo AI deal “won't put AMD on par with Nvidia,” Reitzes believes “it does help in terms of being able to support its ecosystem and driving some incremental business."

Beyond that, Reitzes sees AMD benefiting from a PC upgrade cycle, "helped by an aging installed base and improved corporate demand" - and with the potential for another shot in the arm from AI PC sales.

AMD stock has a consensus “Strong Buy” rating overall. Out of the 35 analysts covering the stock, 28 suggest a “Strong Buy,” one recommends a “Moderate Buy,” and the remaining six give a “Hold” rating. 

The average analyst price target of $195.17 indicates a potential upside of nearly 20% from the current price levels. Meanwhile, the Street-high price target of $265 suggests that AMD stock could rally as much as 62.3%.