AMD Takes The Fight To Nvidia With Latest AI Chip Launch. Is The Stock A Buy At $116?

Advanced Micro Devices stock (NASDAQ: AMD) hosted an event to unveil its latest chips tailor-made for the booming artificial intelligence (AI) market.  The newly launched chips include the Instinct MI300X – the third iteration of AMD’s Instinct line of data center GPUs – and the Instinct MI300A, a CPU-GPU hybrid chip for servers. Tech giants, such as Meta and Microsoft, have expressed their intention to buy AMD’s newest AI chip, as they look for alternatives to Nvidia. Nvidia currently holds a dominant position in the accelerated computing and AI applications market with high-end chips like the H100, known for training large language models and deploying AI applications. These Nvidia chips, priced at up to $40,000 apiece, are currently in short supply.

Following the launch of OpenAI’s surprisingly competent generative AI tool, ChatGPT, major tech players have been scrambling to incorporate AI into their software offerings, leading to a surge in demand for graphics processing units, the de-facto chips for running AI-related workloads.  To get a sense of how big the demand surge is, we can take a look at Nvidia’s recent earnings. Sales for Q3 rose by over 3x to $18 billion, while net income surged over 10x compared to last year to $9.2 billion.

Now, AMD is an established player in the GPU space, although its chips have typically been used more for gaming and professional applications compared to Nvidia’s chips which have been the go-to chips for accelerated computing. However, with the MI300 series, AMD is addressing its handicap in the AI space. AMD says that the MI300X platform will have 2.4x greater memory capacity, and 30% more compute power compared to Nvidia’s H100 HGX platform. While AMD says that training performance for a large language model will be similar, the improved memory capabilities should result in greater cost savings, which could be crucial given the scale at which AI models operate. The memory specs of the new AMD chip are also ahead of Nvidia’s newest chip, called the H200, which is expected to be launched during the second quarter of 2024.  That said, Nvidia does have an edge compared to AMD given that it has spent years developing an ecosystem of sorts around its AI chips, with CUDA (Compute Unified Device Architecture) programming languages and software, which give the company an edge in locking in some customers. This means that customers who have already invested in building applications using Nvidia’s GPUs will likely continue to remain customers in the long run. While AMD is  also improving its software suite called ROCm, Nvidia does have a head start on the software front.

AMD stock has shown strong gains of 30% from levels of $90 in early January 2021 to around $115 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. However, the increase in AMD stock has been far from consistent. Returns for the stock were 57% in 2021, -55% in 2022, and 80% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that AMD underperformed the S&P in 2022.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AMD face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

The AI processor space is still in its infancy and it is unlikely to be a “winner takes all” type of market. AMD still has a good shot at scaling up if its new chipsets perform as promised. The growth prospects are sizable. AMD has indicated the total market for AI GPUs could rise to $400 billion over the next four years. However, AMD isn’t forecasting sizable sales for its new AI chips just yet, indicating that its total data center GPU revenue for 2024 could come in at about $2 billion. This compares to $14 billion in data center sales for Nvidia in Q3 alone (although this includes all the company’s data-center-focused offerings, AI chips are likely to be the biggest contributor). AMD’s valuation isn’t exactly cheap at the current market price of $116 per share, considering that the stock trades at about 44x consensus 2023 earnings, despite revenue expected to contract for the year.  We value AMD stock at about $122 per share, which is about 5% ahead of the current market price. See our analysis on AMD Valuation: Is AMD Stock Expensive Or Cheap?

[1] Month-to-date and year-to-date as of 12/7/2023
[2] Cumulative total returns since the end of 2016

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