Advanced Micro Devices (AMD) stock price has remained in a deep bear market this year as concerns about the artificial intelligence (AI) industry continued. It has dropped by over 35% from its highest point this year, giving it a market cap of over $246 billion.
AI growth concerns remain
In theory, the artificial intelligence industry is doing modestly well. Just recently, there are reports that OpenAI, the developer of ChatGPT, is about to raise funds at a $150 billion valuation. Just recently, we reported that the firm’s fundraising from Apple and Nvidia were funding it at a $100 billion.
Nvidia, the posterchild of the AI industry is also doing well, as evidenced by its secons-quarter financial results. Its revenue jumped to over $30 billion in the second quarter, up by over 115% from the same period in 2023. Its quarterly results were higher than what the company made in 2022.
This growth happened as companies and governments continued to accumulate its GPUs as AI investments jumped. It is estimated that large tech companies and governments will spend over $1 trillion in AI investments in the next few years.
The challenge, however, is that there are signs that AI investment is getting out of hand with no immediate benefit. In a recent research paper, analysts at Goldman Sachs warned that transformation changes will not happen quickly, and that AI would take over a decade to go mainstream.
Most importantly, the analysts warned that to generate an adequate return on the $1 trillion, the AI industry will need to solve complex problems.
AMD is seen as an Nvidia alternative
AMD, which is run by Lisa Su, who is Nvidia’s CEO’s cousin, is often seen as Nvidia’s alternative, especially now that Intel is not doing well.
AMD, which is a big player in the CPU industry, recently launched the Mi300 Series, which is seen as a good and cheaper alternative to Nvidia’s HP-100. The only challenge is that Nvidia owns the CUDA software that lets developers convert the GPUs for general-purpose computing tasks.
Analysts expect that AMD will ultimately catch up and start to gain market share in the GPU and AI industries. Recent data shows that the company is achieved about 10% share in the industry as it generated $1 billion in revenue. AMD also raised its guidance to over $4.5 billion even as concerns about Microsoft slashing spending continuing.
AMD’s data center revenue could do well as more companies opt for its GPUs, which are seen as being lower priced.
Growth and valuation concerns
AMD needs to take market share in the data center GPU industry because of the ongoing slow growth in the PC industry, as I noted on my HP article. The results revealed that AMD’s total sales rose by just 9% to over $5.8 billion.
AMD also has weaker metrics than Nvidia, which could improve if the company starts to grow its market share in the GPU industry. For example, while Nvidia has gross margins of 76%, AMD’s stands at 46%. Nvidia’s net profit margin stands at 55% while AMD has a margin of 8%.
AMD’s total data center revenue rose by 115% to $2.8 billion, helped by record GPU shipments and CPU sales.
The company’s other segments like gaming and embedded are not doing well. Gaming revenue crashed by 59% to $648 million while its embedded one fell by 41% to $861 million.
AMD’s growth is expected to start picking up as GPU growth continues. Analysts expect that its revenues for the third quarter will come in at $6.7 billion, a 15.70% increase from what it made in the same quarter in 2023.
For the year, AMD’s revenue is expected to rise by 12.90% to $25.6 billion. It will then grow by over 28% to over $32.9 billion.
A key concern is that AMD is significantly overvalued considering that its growth is relatively slow. AMD trades at a forward P/E ratio of 45 and a trailing multiple of 54, higher than the sector median of about 23. Its valuation multiples are also higher than those of Nvidia, a company that is doing much better.
AMD stock price analysis
The daily chart shows that the AMD share price peaked at $226.90 in March and then suffered a harsh reversal to a low of $122.26 on August 5.
It has moved between the 38.2% and 50% Fibonacci Retracement level. Also, the stock is consolidating at the 50-day and 200-day Exponential Moving Averages (EMA) while the MACD indicator has moved above the neutral point.
Therefore, the stock’s outlook is neutral with a bullish bias. If this happens, the stock will likely bounce back and reach a high of $187, it highest point in July. The alternative scenario is where the stock drops to the next support at $122.26, its lowest swing in August.
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