Investors’ growth expectations for AI chips have turned into “irrational exuberance,” according to one analyst. That’s why the expert downgrades AMD shares.
• Average price target for AMD means the stock will decline
• Analyst downgrades AMD stock
• AI expectations are too high
Chip stocks benefit from AI hype: NVIDIA vs. AMD
The trending topic of AI brought some companies big profits last year. The chip manufacturers NVIDIA and AMD were also among the biggest beneficiaries. Over the past year, NVIDIA’s share price has increased more than three-fold, making the company the industry leader and one of the most valuable companies in the world. In contrast, the value of its smaller competitor AMD has at least doubled. Looking ahead, however, analysts seem to be of the opinion that AMD shares will experience a downturn, while NVIDIA shares are likely to continue to rise.
According to data from TipRanks, NVIDIA stock receives a strong buy recommendation (34x “Buy”, 4x “Hold”) from a total of 38 reviews from Wall Street analysts. The average price target for NVIDIA is $675.40, with an optimistic forecast of $1,100.00 and a bearish forecast of $560.00. The average target corresponds to a growth opportunity of around ten percent compared to the most recent price of $613.62 (as of January 24, 2024).
Analysts are somewhat less optimistic about NVIDIA’s competitor AMD. A total of 35 ratings from the last three months result in a strong buy recommendation (27x “Buy”, 8x “Hold”), but the average price target for the share predicts a downturn: The average price target is 153.22 US dollars , with a high forecast of $200.00 and a low forecast of $105.00. This corresponds to a change of -14 percent compared to the last price of 178.29 US dollars (as of January 24, 2024).
Where is AMD stock headed?
Demand for graphics processors, which are the chips for artificial intelligence and power programs like ChatGPT, has increased significantly in recent months. This led to significant increases in profits for companies that make graphics processing units (GPUs) – including AMD. Investors are betting that the company’s artificial intelligence-focused GPUs, slated to launch this year, could lead to AMD taking market share from NVIDIA, CNCBC reports. This also offers an alternative for major buyers such as Microsoft and Meta.
However, higher expectations for AI chip growth have now led Northland Capital Markets analyst Gus Richard to admit he’s not sure where AMD stock goes from here. “We’re downgrading the rating to ‘Damned if we know,'” CNBC quoted a note from Monday. He said he has a current rating of “Market Perform,” which is equivalent to a “Hold” rating.
AI expectations are too high
Richard’s call is based on his belief that investor expectations for the growth of AI chips have turned into “irrational exuberance,” according to CNBC. He predicts total sales of AI chips of 125 billion US dollars in 2027. He emphasizes that the range of expectations is so wide that some analysts assumed 100 billion US dollars, while others even as much as 400 Billions of US dollars would be expected. “AI is big, it really is big, just not as big as investors think,” explains Richard.
The expert also explains that general demand signals are distorted for several reasons. First, market leader NVIDIA was effectively the “sole source” for AI chips, and demand had outstripped supply, resulting in customers “double-ordering” or buying more in advance than they needed. He also cites recent US moves to ban certain chip exports to China as something that could weigh on growth.
According to Richard’s calculations, if AMD sold $16 billion worth of AI chips in 2027 (doubling every year from $2 billion in 2024), the company would have a market share of around 13 percent and would have to still continue to spend more on research and development to keep up with NVIDIA. He expects AMD to have total sales of $45 billion in 2027, but that number is already priced into the stock.
After the announcement was published, AMD shares fell. It ultimately lost 3.47 percent to $168.18 on Monday. How AMD will develop in the future remains to be seen.
Editorial team finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.
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