AMD's AI Chip Rally: Is It Real or Illusion?

AMD's stock rally raises concerns about its valuation, as it challenges Nvidia's dominance in the AI data center GPU market. Despite AMD's execution and scale, the company still faces challenges in competing with Nvidia's mature software and developer ecosystem. The recent MI355 launch showed performance gains and received better feedback from hyperscalers, but its valuation remains uncertain.

Advanced Micro Devices (AMD) has seen a notable stock rally recently, raising concerns about its valuation as it challenges NVIDIA's dominance in the AI data center GPU market. Despite AMD's strong execution and significant scale, the company still faces substantial challenges in competing with NVIDIA's mature software and developer ecosystem. The recent launch of the MI355 series showed performance gains and received favorable feedback from hyperscalers, but its valuation remains uncertain.

AMD's AI GPU revenue, excluding China-related sales, increased by 40% year-over-year in Q2 2025, contributing to a total data center revenue of $3.2 billion [1]. This growth signals momentum in the AI market, where AMD is positioning itself to capture a larger share. The company's dual-play strategy, combining CPUs and AI GPUs, is designed to target NVIDIA's dominance. However, NVIDIA's entrenched position, holding over 70% of the market, means AMD must execute flawlessly to close the gap.

Investors face a long-term bet on AMD, as the company's 22x P/E ratio suggests undervaluation. However, near-term volatility risks persist amid competitive pressures and supply chain challenges. AMD's gross margins have been impacted by U.S. export restrictions on China chips, costing the company approximately $800 million in inventory and related charges. If licenses for China sales are approved, AMD could see an additional $800 million in revenue, significantly reshaping its valuation [1].

NVIDIA, on the other hand, has seen its share price rally by 56% over the past 12 months, reflecting soaring demand for AI chips. The company's revenue and earnings climbed by more than 80% year on year, making it the world's largest company with a market cap of $4.43 trillion [2]. NVIDIA's agreement with the U.S. government to sell its H20 AI chips to China, subject to a 15% levy on related revenue, allows it to maintain access to this lucrative market despite export controls. However, the financial impact will depend on sales volumes, and strong demand in China may still make the venture profitable.

AMD's upcoming MI450 chip, designed to rival NVIDIA's Rubin architecture, sets out to challenge NVIDIA's dominance. The company has secured OpenAI as a collaborator in its MI450 design and has already gained traction with the MI350 and MI400 series chips. However, the success of the MI450 chip will depend on its performance and ability to gain traction in the market.

In conclusion, AMD's stock rally presents a compelling long-term opportunity but requires patience and a disciplined approach to near-term valuation. The company's AI business is in the early stages of scaling, and its success hinges on the adoption of the MI350/MI400 series and the resolution of export restrictions. Investors should monitor key metrics such as data center revenue growth, gross margin stability, and China-related sales to assess AMD's strategic value in the AI data center GPU market.

References:
[1] https://www.ainvest.com/news/amd-strategic-position-ai-hpc-market-balancing-long-term-growth-term-realities-2508/
[2] https://uk.finance.yahoo.com/news/ai-wars-nvidia-share-price-114522032.html