Goldman Sachs Downgrades AMD to Sell on AI Server Competition, Margin Pressures

Goldman Sachs has downgraded its rating for Advanced Micro Devices (AMD) from "neutral" to "sell" due to intensified competition in the AI server market, pressure on profit margins, and valuation concerns. The firm also reduced its 12-month target price for AMD from $40 to $32, which corresponds to a forward price-to-earnings ratio of 9x for the next 12 months, down from 10x previously. Despite AMD's stock price surging 38% year-to-date, making it the best-performing stock in Goldman Sachs' hardware coverage, analysts believe the current risk-reward profile is no longer attractive.

The report highlights three main concerns. Firstly, the AI server market is becoming increasingly competitive. As competitors increase their research and development investments, product differentiation is weakening, and the market opportunities are vast, which could erode AMD's first-mover advantage in the AI server segment. Secondly, gross margins are expected to decline. The firm forecasts that gross margins will continue to decrease from 2025 to 2027, influenced by factors such as the transition of Blackwell products, dual pressures from the supply chain and customer end, and intensified industry competition. Goldman Sachs' gross margin forecasts for 2026 and 2027 are both lower than market consensus estimates. Lastly, there are doubts about the sustainability of AMD's valuation premium. Compared to peers like Dell, which have a 9x price-to-earnings ratio, AMD's current 12x valuation premium is expected to narrow over time. The firm states that due to insufficient product differentiation in AI servers and risks associated with customer and supplier concentration, AMD's valuation premium is unlikely to be sustained.

Due to lower revenue expectations and margin pressures, Goldman Sachs has adjusted its earnings per share (EPS) forecasts for 2025-2027 to $2.57, $3.26, and $3.70, significantly lower than market expectations. The firm's concerns about the AI server market, profit margins, and valuation have led to a more cautious outlook for AMD, prompting the downgrade to a "sell" rating. The competitive landscape, declining margins, and valuation risks all contribute to a less favorable risk-reward profile for the company. Investors should consider these factors when evaluating AMD's prospects in the AI server market.