Advanced Micro Devices (AMD) has recently made headlines with its ambitious plans to venture into the field of artificial intelligence (AI). While this move positions AMD as a potential key player in the AI chip space, investors should be cautious as the stock now appears to be pricier than its main competitor, Nvidia.
AMD's latest announcement includes the introduction of new products specifically catered to enhance the performance of AI applications. Among these products are laptop processors that boast a staggering 60% improvement in AI capabilities, as well as data-center chips that outperform comparable Nvidia products by up to 60% in certain AI workloads.
The market's response to this news has been evident, with AMD emerging as a top performer in the S&P 500 index. Subsequently, the company's shares have continued to climb, recording an additional 1% increase on Friday. Overall, AMD's stock has observed an 8% gain since the initial announcement of its groundbreaking products.
This successful streak further solidifies AMD's position as a key player in the AI chip industry. With its innovative products and an immense market opportunity ahead, it is clear that AMD's entrance into the AI market has certainly caught the attention of both investors and industry experts alike.
AMD's Position in the AI Space
It is undeniable that AMD is making significant strides in the AI space, posing a challenge to Nvidia, the dominant player in the market. However, investors should take note of the sky-high valuation of AMD's stock.
AMD currently commands a higher forward P/E multiple compared to Nvidia, despite the fact that it has yet to sell any AI graphics processing units (GPUs) in meaningful volumes. Nvidia, on the other hand, holds almost 100% market share in AI GPUs.
This raises concerns about AMD's valuation. The stock trades at nearly 35 times next year's estimated earnings, which is a 50% premium to its peers. In comparison, Nvidia trades at 24 times next year's earnings estimates, aligning with its peers.
While analysts surveyed by FactSet maintain an average Buy rating for AMD stock, the consensus target price suggests a modest 3% increase from its current levels, leaving limited upside potential.
The bullish case for AMD rests on the potential for its new AI-focused products to prompt a reevaluation of the stock. If analysts adjust their financial estimates and stock price targets accordingly, the valuation may become more reasonable. However, for now, AMD appears to be expensive with limited room for further gains.