Advanced Micro Devices or AMD (AMD) is a key competitor in artificial intelligence (AI), but in terms of market share, it is only a small player. However, AMD is investing in its “full-stack” offering which could seriously enhance its competitiveness and, in turn, boost its positioning within the market. The company could start to outperform peers and gain market share in AI, and that’s what forecasts suggest. Personally, therefore, I’m bullish on AMD stock, even after its recent rebound.
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AMD’s AI Positioning
AMD is a leading semiconductor company based in Santa Clara that, like many famous peers, designs and produces high-performance computing and graphics processors. In recent years, AMD has been making significant advancements in the field of AI and data centers, reflecting broader market trends. This bodes well for its investment prospects.
Despite playing second fiddle to Nvidia (NVDA), AMD claims that its EPYC processors and Instinct accelerators offer superior performance for AI inferencing workloads, especially in data centers. The company’s MI300X accelerator, for instance, is touted as providing exceptional performance for large language models and generative AI applications. It’s worth noting that Nvidia has dismissed any comparison with its market-leading chips.
As alluded to, when it comes to market share in AI and data centers, AMD still lags behind its main competitor. While AMD has been gaining ground on Nvidia, it remains a smaller player with less than 5% of the graphics processing unit (GPU) market share for AI. Including computer processing units (CPUs), AMD had around 11% of the AI market share in 2023.
AMD’s Full-Stack Shift
Why is AMD so far behind? Well, Nvidia had a significant head start with years of activity in the GPU segment, having built software to support client customization. However, AMD’s journey into the full-stack (both hardware and software) AI arena took a major leap forward with its recent acquisition of ZT Systems. This arguably represents the company’s first major foray into comprehensive AI software solutions, supporting my bullish outlook.
The acquisition of ZT Systems is expected to enhance AMD’s AI capabilities in several key areas by improving system-level integration, reducing time-to-market for AI solutions, and expanding reach into the hyperscale market.
The company’s management stated, “AMD expects the transaction to be accretive on a non-GAAP basis by the end of 2025.” That was from an August 19 press release, which also mentioned that the strategic acquisition will “provide AMD with industry-leading systems expertise to accelerate deployment of optimized rack-scale solutions addressing $400 billion data center AI accelerator opportunity in 2027.”
Can AMD Effectively Compete?
These improvements are poised to strengthen AMD’s competitiveness, primarily against Nvidia, with Intel (INTC) suffering its own innovation challenges. From the outside, it’s certainly hard to tell if AMD is really competing at Nvidia’s level, but it’s certainly true, as highlighted by other analysts, that companies pursue diversity of supply. If AMD can achieve a full-stack offering that’s even in the same ballpark, it will likely gain more traction among customers.
More broadly, while AMD has historically lagged behind Nvidia in AI market share and profitability, the gap appears to be narrowing. AMD’s return on capital employed (ROCE) has been steadily improving in recent years, approaching Nvidia’s impressive figures.
AMD Stock’s Valuation and Technical View
The market seems confident that AMD will be very competitive based on the impressive growth expectations out there. Current forecasts suggest that earnings per share (EPS) will rise at a 40%+ pace over the next few years.
The high expectations explain why the stock is currently priced at 47.2x forward earnings. It’s not cheap, but growth expectations imply that AMD stock trades at a PEG ratio (price-to-earnings-to-growth) of 1.12. That’s 38.6% lower than the information technology sector as a whole.
The technical view on AMD’s stock right now is mixed, but moving averages are constructive at this point. AMD shares are currently trading above their 50-day and 200-day moving averages, with the 50-day SMA having recently made a golden cross. Click on the below image too see more technical analysis details.
Is AMD Stock a Buy, According to Analysts?
On TipRanks, AMD comes in as a Strong Buy based on 25 Buys, six Holds, and zero Sell ratings assigned by Wall Street analysts in the past three months. The average AMD stock price target is $188.04, implying a more than 15% upside potential.
The Bottom Line on AMD Stock
AMD still trades at a meaningful discount to its average share price target, and I think this reflects the company’s growth prospects and potential tailwinds as it improves its full-stack offering. While we will learn more in the coming months, AMD’s recent acquisition of ZT Systems could instigate the company’s next move. I have a bullish view of AMD stock. Meanwhile, the company’s next quarterly earnings date is anticipated to be October 29, about four weeks from now.
