Advanced Micro Devices (AMD) experienced a sharp 8% decline in stock value on Wednesday following a quarterly revenue forecast that failed to meet investor expectations for accelerated growth in artificial intelligence (AI). Despite a substantial 156% increase in stock value since the end of 2022, AMD’s tempered outlook, especially regarding its AI chip sales targets for 2025, highlights growing concerns over supply constraints and competition in the burgeoning AI chip market. Analysts note the mismatch between rising AI chip demand and production capacity, which has impacted the firm’s near-term revenue growth and potentially put $20 billion in market value at risk.
Shares in Advanced Micro Devices (AMD) dropped by 8% on Wednesday, a slide that may reduce its market valuation by nearly $20 billion. Investors, who have closely followed AMD’s rise in the AI chip market, were disappointed with a forecast that suggested more conservative growth than expected. AMD’s revenue has benefited substantially from surging demand for AI-driven processors, bolstered by the expanding generative AI market. However, the latest forecast for a $5 billion AI chip sales target by 2025 and challenges in supply have tempered expectations, especially when compared to the seemingly resilient positioning of rival Nvidia, the current leader in AI chips.
AMD has faced intensified scrutiny as investors expected a revenue leap driven by generative AI’s rapid adoption across industries. Yet, the company’s latest guidance reflects a tightening in supply for its AI processors, presenting a reality check for growth that is being questioned by both analysts and investors. CEO Lisa Su’s remarks indicate supply limitations that may persist into 2024, underscoring a bottleneck in chip manufacturing that could hinder AMD’s AI revenue growth.
AMD has been one of the key beneficiaries of the AI explosion that has fueled chip demand globally. The company’s shares have risen dramatically, climbing approximately 156% since late 2022. Fueled by unprecedented growth in generative AI applications, which require extensive processing power, AMD’s position in the AI chip market attracted significant investor interest. Demand for advanced processors tailored to AI tasks, such as data analysis, machine learning, and neural networks, has created a high-stakes race among chipmakers, and AMD quickly became a prominent player in this space.
Despite this growth, the AI chip market remains fiercely competitive. Nvidia’s dominance, both in hardware and software support for AI applications, has kept AMD in a catch-up position. Meanwhile, rising demand has outstripped supply, highlighting production bottlenecks. AMD and Nvidia both rely on Taiwan Semiconductor Manufacturing Company (TSMC) for their most advanced chips. As the world’s largest semiconductor manufacturer, TSMC’s limited capacity has created a bottleneck, impacting AMD’s ability to meet the burgeoning demand for AI chips.
Analyst reactions to AMD’s forecast have been mixed, with several firms lowering their target prices for the stock. Stacy Rasgon, an analyst at Bernstein, noted that AMD’s forecast may disappoint investors who have come to view the company as a pure “AI play,” expecting it to capitalize fully on the AI boom. Rasgon remarked that simply “guiding inline” rather than delivering outsized growth can be disappointing for those who expect continuous growth momentum, particularly as competition intensifies.
The “lumpiness” that AMD hinted at in its 2025 projections also contributed to the cautious outlook. Jefferies analysts expressed concern that AMD’s ability to surpass current estimates, which hover around $8 to $9 billion in 2025, may be limited due to production constraints.
Other chipmakers, including Qualcomm and Arm, saw their stocks decline in tandem with AMD’s, underscoring broader supply-related concerns that could impact other firms within the AI chip ecosystem. However, Nvidia’s stock remained relatively steady, dropping by only 0.3%, suggesting that investors are more confident in Nvidia’s supply resilience, possibly due to its dominant position and unique production arrangements with TSMC.
AMD and Nvidia both rely heavily on TSMC to produce their advanced AI chips, and any bottleneck at TSMC reverberates through the industry. TSMC, which controls over half of the global semiconductor foundry market, operates at near-full capacity, meaning that any incremental increase in demand is unlikely to be met without substantial delays or additional investment in manufacturing facilities.
With TSMC’s current facilities operating at full tilt, expanding production to meet the high demand for AI chips will require massive investment and time. Despite its close relationship with TSMC, Nvidia has secured preferential treatment in terms of access to production lines, given its size, consistent demand, and established dominance in the AI market. This dynamic places AMD in a challenging position, as its share of production resources may not increase in lockstep with its ambitions for the AI market.
In terms of valuation, AMD trades at approximately 32 times its 12-month forward earnings, compared to Nvidia’s multiple of 36. Though close, Nvidia’s slight valuation premium reflects investor confidence in its established AI ecosystem and sustained leadership in the sector. Analysts estimate that Nvidia’s existing technological advantage, including proprietary AI software stacks and data-center-specific chips, places it several steps ahead in the AI race.
AMD’s valuation, while robust, indicates some hesitation among investors regarding its ability to compete head-to-head with Nvidia, especially if supply constraints persist.
AMD’s $5 billion sales target for 2025 implies a moderate, though still significant, increase in AI-related revenue. However, Nvidia’s current lead in AI-driven sales outpaces AMD by a wide margin, with projections that Nvidia’s AI revenues will continue to surge, particularly as it integrates new AI offerings designed for data centers and high-performance computing.
AMD’s future growth may hinge on strategic shifts and addressing the fundamental supply challenges tied to TSMC. Diversifying its supply chain, if feasible, could allow AMD to meet demand more effectively, but the semiconductor manufacturing space is notoriously difficult to navigate, with very few companies capable of producing chips at the scale and complexity AMD requires.
In addition to production hurdles, AMD faces the challenge of carving out a unique position within the AI chip market. Nvidia’s GPU dominance is backed by its CUDA platform, which is now the industry standard for many AI applications. AMD has responded with its own ROCm platform, aimed at fostering an open-source ecosystem around its GPUs. Yet, Nvidia’s established user base and software offerings continue to provide it with a substantial edge in retaining and attracting AI-centric customers.
The evolution of AMD’s strategy may involve targeting niche segments within the AI market, including edge computing and gaming, where it has historically excelled. AMD’s accelerated processing units (APUs) and collaborations with cloud service providers could offer an opportunity to capture market share outside Nvidia’s primary domain.
Following the revenue forecast announcement, at least ten analysts lowered their price targets for AMD stock, while eight revised their estimates upward, bringing the median target to $187.50. This new target suggests a potential upside of 13% compared to AMD’s most recent closing price, indicating that analysts still see long-term potential in the company despite near-term hurdles.
The lowered price targets reflect growing caution among analysts, who are wary of the potential for supply constraints to impact AMD’s ability to meet high demand. Meanwhile, investors seem to be hedging their bets, with some indicating confidence in AMD’s long-term prospects but cautioning that short-term volatility may persist.
The revised price targets and fluctuating market sentiment indicate a mixed outlook for AMD as it seeks to establish a firm foothold in the AI chip market. Despite the challenges, the company remains well-positioned to benefit from ongoing AI adoption across industries, provided it can navigate production constraints and differentiate its offerings from Nvidia’s.
