AMD has been making waves in the AI industry, focusing on building a comprehensive AI ecosystem that sets them apart from the competition.
Investment Thesis
Since the last coverage of Advanced Micro Devices, Inc. (NASDAQ:AMD) in April, the stock has outperformed the market by 13.49%, yet trails behind NVIDIA Corporation (NVDA) which increased by roughly 50%. Despite ranking second in the AI-chip market, AMD has not been able to keep up with Nvidia's share price. The belief that Nvidia leads in the AI GPU race may be a reason for the undervaluation. However, AMD's approach sees the AI chip race moving towards a combination of CPUs, multiple GPUs, and servers, creating a diverse ecosystem of technology from various companies. The acquisition of Silo AI for $665 million integrates advanced AI technologies into AMD's product lineup, positioning them as a strong competitor in the AI market.
Why I Am Doing Follow-Up Coverage
The market undervalues AMD's potential, evident in their below-sector median forward PEG ratio of 1.16, compared to 2.06. The focus on building an AI ecosystem that the market has yet to fully appreciate is the key to AMD's success, making follow-up coverage essential.
AI Ecosystem: What Does This Mean?
AMD's strategy goes beyond powerful GPUs for enterprise servers, involving a range of AI-enabled hardware for personal work computers and servers. New products like AIPC 300 series and Ryzen 9000 desktop processors showcase AMD's innovation and leadership in AI inferencing performance. The acquisition of Silo AI adds AI expertise and solutions to their portfolio, expanding their market reach.
Earnings Expectations Are Coming Down
Despite the AI revolution's acceleration, downward revisions for AMD's EPS and revenue estimates indicate a cautious market sentiment. However, demand for AMD's technology continues to surpass expectations, pointing towards future growth potential.
Valuation
AMD's undervaluation is evident in their forward non-GAAP PEG ratio of 1.16, 43.50% below the sector median. With significant EPS growth projections, there's a clear disparity between market valuation and potential growth. A convergence towards the sector median PEG could signify a substantial upside.
Risks
While AMD's growth prospects are promising, slowing AI demand and competitive challenges pose risks. Nvidia's dominance in the AI GPU market remains a hurdle, but AMD's ecosystem advancements position them as a strong contender.
Bottom Line
Despite underperforming Nvidia and the market, AMD's focus on AI ecosystem development sets them apart. While risks exist, the qualitative projections point towards AMD surpassing market expectations. AMD remains a strong buy with the potential for significant growth.