Too Far, Too Fast. Hi everyone. Advanced Micro Devices has surged in recent months on growing optimism that it will be another winner in the artificial-intelligence infrastructure trade. For some, AMD even holds the hope of being Nvidia Part Two—a chip maker that can remake itself on the back of AI.
But caution is in order. On Wednesday, AMD shares were down 6.5%, a day after the company reported solid second quarter earnings results. On the surface, the numbers looked fine, with better-than-expected revenue for the June quarter and a robust sales outlook.
But there are cracks appearing in the story and investors should resist the temptation to buy on the dip. Evidence suggests AMD shares are a risky opportunity at current levels.
Wall Street tends to focus on the data center as AMD’s most important end market, where its GPU and server CPU businesses reside. But nearly all the revenue upside came from AMD’s gaming unit, while the data center segment grew just 14% versus the prior year, roughly in line with analysts’ estimates and slower than the unit’s 57% growth in the first quarter.
Then there’s the outlook for AMD’s AI GPU business. At the company’s Advancing AI event in June, AMD announced its latest AI chips to compete with Nvidia: the AMD Instinct MI350 series. OpenAI CEO Sam Altman made an appearance at the event and expressed his excitement over AMD’s future road map, raising investor expectations heading into the quarter.
Investors have been growing more optimistic about AI-related stocks as large technology companies have raised their capital expenditure spending plans this earnings season. AMD shares participated in the rally. As of Tuesday’s close, the stock is up 44% this year, with a 73% gain over the last three months. Nvidia shares, by comparison, are up 33% this year and 57% over the last three months.
During AMD’s earnings call on Tuesday, analysts wanted clarity on whether the MI350 would quickly take advantage of robust AI infrastructure demand. But the picture they were given was vague, driving AMD stock lower in after hours.
Analysts asked AMD management several times for more details on the company’s second-half revenue outlook around the AI GPU business. Each time, and unlike last year, AMD CEO Lisa Su declined to give a real forecast. Instead, she said there would be a “steep” production ramp in the second half of the year, while repeatedly emphasizing there is “significant interest” from customers in its MI400 series slated for next year.
The hesitancy to get specific on the numbers, the mixed data center performance, and the focus on MI400 suggests AMD’s MI350 may not provide the big revenue boost AMD investors have hoped.
The focus on the follow-up MI400 makes sense. The AI data center market has been moving toward “full stack” rack-scale AI servers which incorporate dozens of chips, networking, and software. Nvidia had some initial production hiccups in moving to its own rack-scale GB200 NVL72, which incorporates 72 GPUs linked together inside one server rack, but it is now shipping in volume. The MI400 will be AMD’s first rack-scale, 72 GPU data center AI server offering.
The problem is the non-rack-scale MI350 is unlikely to be competitive with Nvidia’s current rack-scale offerings. And it means AMD investors could have to wait at least four quarters before the company’s AI GPU business truly takes off with the MI400 . There is also risk AMD may have trouble building its first rack-scale AI server just like Nvidia did, which could mean delays.
“The call on AMD remains the MI4XX [MI400] ramp (in a year), which (on paper at least) is supposed to attempt to close the raw performance gap and bring rack-scale offerings to AMD’s portfolio,” Bernstein analyst Stacy Rasgon wrote in a note Wednesday. “Perhaps people will be willing to dream until then. Or, perhaps not.”
Given the uncertainty, AMD stock looks fully valued. It trades at 32 times forward earnings, with revenue growth of 32% in its latest quarter. Nvidia trades at a slight premium of 36 times, but its revenue is growing at 69%. And I’d argue that current Wall Street estimates for Nvidia earnings are understated since its GB200/GB300 NVL72 is only now ramping in a big way.
At the moment, AMD shares are a bet on the company’s future ability to deliver on its rack-scale AI server, something Nvidia has already done. Until AMD delivers a successful rollout of that MI400 GPU, which won’t happen before next year, the stock is likely to tread water.
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