The optimism around generative artificial intelligence (AI) has kicked off a rally in several tech stocks this year, with expectations of billions of dollars worth of opportunities in the years ahead. While semiconductor giant Nvidia (NASDAQ:NVDA) is being viewed as the frontrunner in the AI space due to its advanced graphics processing units (GPUs) that are required to power AI applications like ChatGPT, several Wall Street analysts are also optimistic about the prospects of chipmaker Advanced Micro Devices (NASDAQ:AMD) and see a solid upside potential in the stock.
Analysts Bullish on AMD’s Potential
The robust demand for Nvidia’s AI chips due to the generative AI boom has overshadowed other chipmakers like AMD. Nvidia has an early-mover advantage when it comes to AI chips. On Wednesday, Nvidia not only exceeded Wall Street’s lofty expectations for the fiscal second quarter with 101% revenue growth but also issued a guidance that suggests 170% year-over-year top-line growth in Q3 FY24.
Meanwhile, AMD’s Q2 FY23 (ended July 1, 2023) results topped expectations despite an 18% year-over-year decline in revenue to $5.4 billion due to persistent weakness in the PC market. Further, the company’s fiscal third-quarter guidance fell short of expectations. Nonetheless, the company is optimistic about the road ahead and projects a “large ramp” in the Data Center segment’s performance in the second half of the year.
During the second quarter, AMD unveiled its new AI chip, the MI300X chip, the production for which is expected to speed up in the fourth quarter. This chip is anticipated to challenge Nvidia’s dominance in the AI market.
Earlier this month, Citigroup analyst Christopher Danely upgraded AMD to Buy from Hold and increased the price target to $136 from $120. The analyst admitted that he was wrong about two aspects – that AMD’s AI products (MI300) would be margin dilutive and investors would eventually notice the expensive valuation of the stock.
Echoing similar views, Daniel Skelly, a senior investment strategist at Morgan Stanley on August 10, discussed recent changes made by his firm to its U.S. portfolio. Skelly revealed that Morgan Stanley, which has a Buy rating on AMD, increased its position in the stock, as it views the company as a leader in semiconductor end markets with potential tailwinds in AI. He said the stock’s valuation seems reasonable, given its “potential cyclical and secular positioning into 2024+.”
Skelly added that despite worries about cyclical challenges impacting AMD’s core end markets, the company has displayed signs of progress and improved performance.
Like Danely and Skelly, Raymond James analyst Srini Pajjuri is also optimistic about the stock. He reiterated a Buy rating on the stock with a price target of $145 on August 2. Following the Q2 earnings call, the analyst noted that AMD’s AI engagements were “tracking well,” given the design wins with Microsoft (NASDAQ:MSFT), Meta Platforms (NASDAQ:META), and Amazon (NASDAQ:AMZN). That said, the analyst thinks it could take time for AMD’s revenue to ramp, as “qualification cycles typically take a few quarters.”
Is AMD a Buy, Sell, or Hold?
Wall Street has a Strong Buy consensus rating on Advanced Micro Devices stock based on 25 Buys and seven Holds. The average price target of $141.90 implies an upside potential of about 30% from current levels. AMD shares have advanced 69% year-to-date compared to the 222% rise in NVDA stock.
Investors should note that Northland Securities analyst Gus Richard is the most accurate analyst for AMD stock, according to TipRanks. Copying his trades on Advanced Micro Devices and holding each position for one year could result in 85% of your transactions generating a profit, with an average return of about 87.4% per trade.
Conclusion
While the spotlight is on Nvidia currently due to stellar demand for its AI chips, most Wall Street analysts are also positive about AMD’s growth potential in the AI space. Under the leadership of CEO Lisa Su, AMD has grabbed Intel’s (NASDAQ:INTC) market share in the central processing unit (CPU) space over recent years. The company has the financial muscle and technology to compete with Nvidia as well and capture opportunities in the AI market in the years ahead.
