AMD, one of the hottest tech stocks on Wall Street, recently received an unusual downgrade following a nearly 130% surge in its shares last year. This has led to questions about its overstretched valuation and potential in the artificial intelligence (AI) market.
On Monday, Northland Capital Markets adjusted its rating for AMD from Outperform to Market Perform, which is akin to a hold rating. Following this report, AMD's stock saw a decline of over 3%.
"We downgrade on valuation to "a heck if we know" rating," stated Richard from Northland Capital Markets in his Monday note. He voiced skepticism about the extent of AI's impact.
AI is big, it"s really big, just not as big as investors are thinking, Richard wrote.
He pointed out that demand signals might be misleading due to several factors. Firstly, Nvidia, being effectively the only source of AI chips, has seen demand exceeding supply. This has resulted in customers double ordering, or purchasing more than needed in anticipation. Moreover, he highlighted recent U.S. restrictions on certain chip exports to China as a potential hindrance to growth.
While chip prices are cyclically driven by supply and demand, they remain flat over the long term, he noted. We also believe that AI demand in CY23 was overstated due to double ordering.
According to Richard's estimation, if AMD were to achieve $16 billion in AI chip sales in 2027 — doubling each year from $2 billion in 2024 — the company would hold a market share of about 13%. To keep up with Nvidia, AMD would need to continually invest in research and development. He projected AMD's total revenue for 2027 to be $45 billion, a figure he believes is already reflected in the stock's current price.