With MI300X Does AMD Really Have What It Takes To Challenge Nvidia In AI?

Advanced Micro Devices stock (NASDAQ: AMD) has gained close to 40% over the past year. In contrast, AMD’s peer Intel stock (NASDAQ:INTC) has gained a mere 4% over the last 12 months. Although AMD’s financial performance in recent quarters has been mixed, as the PC market only slowly recovers from the post Covid slump, and the gaming business also facing headwinds, investors appear optimistic about the company’s AI business. Graphics processing units, or GPUs, are becoming the de-facto chips for running AI-related workloads, and AMD has been a long-standing player in this space.  While AMD’s GPUs have typically been used more for gaming and professional applications compared to Nvidia’s chips, which are the go-to GPUs for accelerated computing applications, AMD is also now focusing on winning over the AI market.

AMD’s Data Center segment – which includes sales of its server chips, as well as the MI300 series AI chips, saw sales rise by about 80% year-over-year to $2.3 billion in the most recent quarter.  The MI300 has become one of AMD’s fastest-selling chips with CEO Lisa Su indicating that the chip recorded over $1 billion in sales in less than two quarters since it launched last December. AMD also claims that its new Instinct MI300X chip outperforms Nvidia’s chips in several parameters. AMD is now projecting AI chip sales of $4 billion for the year, an increase from the $3.5 billion projected back in January. It’s likely that the final number could be a bit higher, given the surging demand for AI applications and the need to diversify away from supply from Nvidia which practically owns the AI market.  Big tech companies including Alphabet, Meta, and Microsoft are quickly expanding their data centers to support AI workloads, and the supply of Nvidia’s latest chips remains constrained. Moreover, costs are also becoming an issue for customers, as Nvidia has incredibly strong pricing power in the current market, with its net margins standing at a whopping 57% in the most recent quarter. Nvidia’s top-end H200 and the new Blackwell architecture chips are expected to see supply lag demand well into the next year. This could benefit AMD, as customers increasingly seek alternatives to build out data centers quickly and more affordably.

The generative AI surge has driven AMD stock up by 85% from levels of $90 in early January 2021 to around $165 presently. This compares to an increase of about 40% 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 128% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 MSFT, AAPL, and NVDA, and even for the mega-cap 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?

AMD stock has seen a meaningful rally over the past year. However, AMD trades at about 47x consensus 2024 earnings, which is a relatively high multiple. There is a possibility that the big surge in GPU demand that we are currently seeing will ease, as the initial training phase of AI large language models slows down. After the training of models, the phase of utilizing these models could shift toward lower-power requirements, or potentially even on-device capabilities, reducing demand growth for GPUs. We value AMD stock at about $163 per share, which is roughly in line with the current market price. See our analysis on AMD Valuation: Is AMD Stock Expensive Or Cheap? for more details on what’s driving our price estimate for AMD. Also, check out our analysis of AMD Revenue for more details on the company’s key revenue streams.

[1] Returns as of 5/25/2024
[2] Cumulative total returns since the end of 2016

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