Advanced Micro Devices (AMD) Stock: A Buying Opportunity or Value Trap?

TLDR

Table of Contents

AMD stock has dropped 45-49% over the past year as it struggles to close the gap with Nvidia in AI chips
KeyBanc analyst John Vinh downgraded AMD to Neutral, citing concerns about competition and margin pressure
Strong demand in China for AMD’s MI308 chips may not be sustainable due to potential US export restrictions
Intel’s aggressive price cuts (20-40%) could trigger a price war affecting AMD’s gross margins
Recent ZT Systems acquisition may not provide immediate competitive advantage against Nvidia’s next-gen chips

Advanced Micro Devices has hit a rough patch. The chipmaker’s stock has tumbled nearly 49% since July 2024, even as the broader market has shown more modest declines. While the S&P 500 trades about 13% below its January peak, AMD’s fall has been much steeper.

This drop comes at a time when AI technology drives many tech stocks to new heights.

AMD’s Instinct processors are considered cost-effective AI accelerators. The company’s Epyc CPUs are well-suited for managing these powerful chips.

So why is AMD struggling? KeyBanc analyst John Vinh, ranked among the top 3% of Wall Street experts, recently downgraded the stock to Neutral.

Vinh points to several challenges facing the company. Most notably, he believes AMD is failing to close the gap with Nvidia in the AI chip space.

The Nvidia Gap Widens

According to Vinh, AMD’s recent acquisition of ZT Systems may not shift the competitive balance anytime soon. The analyst notes that with Nvidia ramping up production of its next-generation GB200 NVL chips, the gap between the companies isn’t narrowing – it’s growing wider.

While AMD’s Instinct MI300X chip has found enterprise customers, the company still appears to be playing catch-up. AMD is planning to launch the stronger Instinct MI350X chips later this year.

The company doesn’t lack impressive credentials. CEO Lisa Su has pointed out that “AMD now powers five of the 10 fastest and 15 of the 25 most energy-efficient systems in the world, on the latest top 500 supercomputer list.”

Many of these systems are directly involved in AI applications.

China Demand: Boom Today, Bust Tomorrow?

On the positive side, supply chain feedback suggests AMD is seeing robust demand in China for its compliant MI308 SKU. This interest comes primarily from hyperscalers like Alibaba and Tencent, driven largely by DeepSeek.

Vinh projects MI308 GPU shipments will reach 300,000 units in 2025, representing the bulk of AMD’s expected growth.

However, there are growing concerns about how long this demand will last. The analyst warns that China’s AI demand might not be sustainable and could be at risk due to potential new U.S. export restrictions.

“Excluding China,” Vinh states, “there is very little to no growth in AI GPUs this year.”

Price Wars and Margin Pressure

Another challenge comes from Intel’s aggressive pricing strategy. Intel has implemented 20-40% price reductions on its Lunar Lake products.

This move could force AMD to respond with its own price cuts to defend or regain market share. Such a price war would likely pressure AMD’s gross margins.

Adding to these concerns, Vinh notes that Xilinx, acquired by AMD in 2022, is showing limited recovery. This creates “potential downside” risk to AMD’s future gross margin expectations.

Intel poses yet another threat as it advances on its 18A process. If Intel delivers on its roadmap, particularly with Diamond Rapids, AMD could lose ground in both client and server segments.

With AMD already commanding over 50% share among cloud hyperscalers, gaining more territory is becoming increasingly difficult. Worse, if Intel executes flawlessly, it could start reclaiming that share.

Even after the stock’s steep decline, Vinh remains cautious. “While the stock is relatively inexpensive, trading at 13x our 2026 EPS estimate, semiconductor stocks rarely work with risk to GMs, which we are increasingly concerned about given the aggressive price cuts by INTC,” he explained.

Current valuation metrics show AMD trading at 15 times forward earnings estimates and 5.9 times trailing sales. These figures are lower than Nvidia’s substantially higher ratios.

From a valuation perspective, some investors might see AMD as undervalued. The company’s combination of healthy revenue growth and widening profit margins could appeal to bargain hunters.

Wall Street opinion on AMD remains mixed. While Vinh and 12 other analysts are staying cautious, 23 analysts still maintain Buy ratings. The stock currently has a Moderate Buy consensus.

The average price target stands at $145.74, suggesting a potential 56% upside from current levels.

For investors interested in AMD stock, analysts suggest considering dollar-cost averaging or buying in thirds strategies. These approaches can help balance out market volatility, providing a reasonable average price over time.

The chip designer’s latest quarterly performance beat revenue estimates, though earnings results have been mixed. This suggests the company’s fundamental business remains relatively strong despite stock price weakness.

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