Analyst Downgrades AMD Stock Due to Uncertain AI Chip Growth, Citing “Irrational Exuberance”

Surging demand for GPUs fuels AMD’s stock rise, but Northland Capital Markets analyst Gus Richard expresses uncertainty about AMD’s future trajectory in the competitive AI chip market.

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As the demand for graphics processing units (GPUs), essential for artificial intelligence applications like ChatGPT, continues to soar, AMD experienced a remarkable 130% surge in its stock in 2023. Investors placed bets on the success of AMD’s AI-oriented GPUs slated for shipment this year, anticipating the company’s ability to challenge Nvidia and provide an alternative for major buyers such as Microsoft and Meta.

However, the elevated expectations surrounding the growth of AI chips have led Northland Capital Markets analyst Gus Richard to express uncertainty about the future direction of AMD shares. In a note on Monday, Richard downgraded AMD to what he humorously labeled a “‘heck if we know’ rating,” with an actual rating equivalent to a market perform or hold recommendation.

Richard’s call is grounded in his perception that investor expectations for AI chip growth have reached a point of “irrational exuberance.” He forecasts total AI chip revenue to reach $125 billion by 2027, but he notes a wide range of expectations among analysts, ranging from $100 billion to $400 billion. According to Richard, while AI is undoubtedly significant, it may not be as colossal as some investors believe.

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Several factors contribute to the distortion of overall demand signals, as outlined by Richard. Nvidia, as the market leader, effectively served as a “sole source” for AI chips, leading to demand outpacing supply. This situation resulted in customers engaging in “double ordering,” where they purchased more than needed in anticipation of potential shortages. Additionally, recent U.S. moves to restrict certain chip exports to China could exert pressure on growth.

In Richard’s analysis, if AMD were to achieve $16 billion in AI chip sales by 2027, doubling annually from $2 billion in 2024, the company would hold approximately a 13% market share. However, he emphasizes that AMD would need to maintain increased research and development spending to keep pace with Nvidia. With a projected total revenue of $45 billion for AMD in 2027, Richard suggests that the current stock price already reflects this estimate.

Following the analyst’s note, AMD shares experienced a decline of about 3.5%, settling at $168.17. Meanwhile, Nvidia shares showed a marginal increase of less than 1%. The uncertainty surrounding the AI chip market and intense competition between AMD and Nvidia are factors to watch as investors navigate the evolving landscape of semiconductor technology.