2023-05-29 05:07:23 ET
Summary
- AMD investors got a remarkable surge last week as Nvidia's robust guidance bolstered its AI tailwinds.
- However, AMD's leadership in data center GPUs is not close to Nvidia's dominance.
- Despite that, AMD is confident of gaining more share against Intel this year in the data center CPU business.
- Cloud service providers might also not want to put all their eggs in Nvidia, lifting AMD's Instinct GPU series.
- With the surge last week, investors have likely priced in the optimism. If you board now, you could be late to the party.
Advanced Micro Devices, Inc. ( AMD ) investors cheered Nvidia Corporation's ( NVDA ) recent earnings release as AMD re-tested highs last seen in early 2022.
As such, the leading picks-and-shovels semiconductor stocks exposed to the AI tailwinds have benefited, as seen in the significant momentum that lifted several semi-stocks. For example, Broadcom ( AVGO ) stock surged toward an all-time high last week, breaking above its December 2021 resistance zone. The leading data center networking leader is well-positioned to be a key beneficiary.
Super Micro Computer ( SMCI ) leveraged its position as an advanced high-performance server solution provider. As such, it has benefited from the AI tailwinds by delivering solutions from its critical partnership with Nvidia. Hence. it's well-primed to benefit from cloud service providers looking for advanced AI server solutions from a leading supplier.
I highlighted in a recent Marvell ( MRVL ) article discussing how management disaggregated its AI-related revenue to help investors assess the robustness of the company's AI drivers. Accordingly, the leading networking supplier expects AI revenue to post a CAGR of 100% over the next two years.
Therefore, I assessed that AI investors are rushing in with fervor as they fear missing out on what could be the next platform shift in computing driven by generative AI.
Some investors might view AMD's accelerated computing opportunity driven by its data center GPUs or the Instinct MI-series as an optionality. AMD reminded investors at a recent conference that it expects an " initial [MI300] revenue ramp in Q4, specifically in the supercomputer and AI workload segments."
Therefore, management is confident with its AI strategic roadmap with the Instinct series, as AMD attempts to "replicate" its success with MI250 on MI300.
In addition, AMD is also scheduled to "outline their AI strategy and vision to set clear expectations" at an upcoming data center and AI event in June. Therefore, I believe investors viewed Nvidia's robust forward guidance positively on AMD's momentum.
Despite not having the software ecosystem that could rival Nvidia currently, the company is still well-placed to leverage as an alternative to Nvidia's dominance.
It's important to note that AMD's moat likely lies in " its x86 instruction set architecture license and chip design expertise." However, I don't think its data center GPU currently attracts a significant moat until CEO Dr. Lisa Su and her team prove that the company can rival Nvidia.
Notwithstanding, that optionality could still gain momentum, as I don't think cloud service providers will want all their eggs to be placed into the Nvidia basket. Nvidia CEO Jensen Huang cautioned investors that its competitors are breathing up the company's neck as he stressed that it faces " fierce competition. "
With Intel ( INTC ) still struggling trying not to lose more market share to AMD in the data center CPU segment, AMD seems well-poised to be Nvidia's primary challenger as they compete for the AI chips market share. Management highlighted that it has channeled resources to offer "support for external workloads and frameworks such as TensorFlow and PyTorch."
In addition, the company is committed to continuing to dedicate "incremental resources over the years to keep up with software development and future frameworks." However, it's also critical to note that AMD's performance and compatibility might not surpass Nvidia's tech stack due to the maturity and optimization of Nvidia's software ecosystem.
AMD updated at its recent conference that it expects to gain more share in the data center CPU segment against Intel this year, potentially reaching the 30% mark from 22% last year. Therefore, if AMD could compete effectively (still an optionality) against Nvidia as the primary alternative supplier, the potential upside could be enticing.
As such, I assessed that AMD investors have likely priced in the AI tailwinds, as AMD has surged well above Wall Street's average price target or PT. Moreover, with AMD priced at an NTM-adjusted P/E of 40x, it suggests that investors are likely betting that management will not disappoint at the upcoming AI conference.
Seeking Alpha Quant rated AMD's valuation with a "D+" grade, below its previous "C-" grade, suggesting its valuation has worsened.
AMD's price action also suggests increasing caution is warranted, and investors should not be tempted to chase the AI hype at the current levels. However, the momentum could take a while to "die off," as astute market operators could attract more FOMO buyers to rush in first.
I suggest it's prudent to wait for a steep pullback before adding. Members of our service managed to catch AMD's recent steep April pullback by adding into the low $80s.
Rating: Hold (Reiterated)
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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