AMD rally looks more fragile than Nvidia’s

Optimism on firm’s AI seen as overblown

Advanced Micro Devices Inc. has kept pace with Nvidia Corp.’s furious ascent of late, but the factors underpinning its rally look less certain.

Optimism over how the chipmaker will benefit from artificial intelligence is seen as overblown, suggesting recent gains could be at risk. Not only is AMD expected to grow slower than Nvidia — whose processing chips continue to be viewed as the gold standard — but the stock is much more expensive.

“It is priced for perfection in the short term, and at these multiples I’m not willing to spin the roulette wheel for what could happen over the long term,” said Thomas Hayes of Great Hill Capital LP, citing declining free cash flow and expanding multiples. “That will always be a formula for an upset.”

At a time when investors are bidding up nearly every stock with an AI story, AMD shares have risen 116 per cent since October 26, when the Nasdaq 100 index bottomed. In that time, Nvidia has gained 128 per cent, while the index itself is up 29 per cent.

AMD’S stock trades at 51 times estimated earnings, making it the third-most expensive component of the Philadelphia Stock Exchange semiconductor index. Not only is Nvidia notably cheaper, with a multiple of 37, but so is Super Micro Computer Inc., the maker of servers that has risen more than 1,200 per cent over the past 12 months and has a multiple of 42.

Analysts have been paring back their expectations. The consensus for AMD’S net 2024 earnings has dropped 16 per cent over the past six months, according to data compiled by Bloomberg, while the view for revenue is down 6.2 per cent over the same period.

Estimates for Nvidia, in contrast, have been surging on the back of repeated blowout forecasts, and the company’s revenue is expected to soar 80 per cent this fiscal year.

While Nvidia’s past several reports confirmed the tailwind it is seeing from AI, others haven’t presented as clear a story. AMD in January issued a downbeat revenue forecast, even as it gave optimistic commentary about the demand for AI chips. Last week, Broadcom Inc. reported disappointing revenue despite Ai-related demand and Marvell Technology Inc. gave a weak forecast.

Investors do expect AMD to be a major player within AI over the long term, and see a huge market for AI chips. In December, the firm estimated the AI chip industry could grow to more than US$400 billion in the next four years, double an estimate it gave a few months prior.

However, that path could be rocky. In another uncertainty, U.S. officials have told AMD the AI chip it made for the Chinese market is too powerful to sell without a licence.

Such unsettled fundamentals are reflected in Wall Street’s more cautious view toward AMD, with the stock’s consensus rating — a proxy for its ratio of buy, hold and sell ratings — lower than that for Nvidia.

Jordan Klein at Mizuho Securities last week compared the “frenzy” for AI chipmakers to the dot-com era. “I am starting to actually get worried,” he said. “Investors are either in pure chase mode, or they are behind their benchmarks and under stress.”

Based on rallies occurring without any new fundamental information, he sees market participants dumping once-popular stocks “in favour of adding more of the ‘AI and semi winners’ that are breaking out week by week.”