AMD stock has declined by almost 5% over the last five trading days. The stock also remains down by about 19% since the start of 2024. In contrast, the S&P 500 has gained about 27% since early 2024. A couple of factors have driven the recent sell-off.
DeepSeek Launch, Intel’s Price Cuts
The unveiling of China’s new resource-light AI model, DeepSeek, roiled the U.S. big semiconductor stocks earlier this week. DeepSeek has reportedly restructured the foundation of AI models, emphasizing software-driven resource optimization over hardware dependency and this could reduce the need for GPUs to carry out tasks. In fact, the company claims that it spent just about $5.5 million to train its V3 model, compared to the $100s of millions that the likes of OpenAI were reported to spend. While DeepSeek’s claims haven’t been verified, industry insiders have praised the company’s innovative methods, which appear to reduce the need for AI computing capacity. DeepSeek’s model is open source, and it is possible that many big tech companies could take inspiration from its methods to cut down costs. If adopted widely, this could cool off the demand for AI computing power, potentially impacting GPU demand. Now, although AMD is a distant second behind Nvidia in the GPU race, this could nevertheless impact the company. Separately, an FDA approval helped boost this company. See What’s Happening With VRTX Stock?
There are also some concerns on the server CPU space as well. While AMD has been gaining share from market leader Intel over the last few years, Intel’s latest server chips, called the Granite Rapids series, are viewed as being much more compelling. The new chips have a maximum processing core count that is double their predecessors, with tests noting that Intel was largely on par with AMD in terms of performance. While the Intel chips were priced at a premium at launch last year, there have been reports that Intel significantly reduced the listed prices for the chips, with prices on the flagship chips cut by as much as 30%. In fact, the pricing per core of Intel’s top-end Granite Rapids chips is now apparently well below that of AMD’s flagship offerings.
There’s Reason To Be Optimistic
The increase in AMD stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 57% in 2021, -55% in 2022, 128% in 2023, and -18% in 2024. The Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could AMD face a similar situation as it did in 2022 and 2024 and underperform the S&P over the next 12 months – or will it see a strong jump?
Despite the recent sell-off, we remain positive on AMD stock. While Nvidia has dominated the AI accelerator market, with its GPUs which have been viewed as the best performing for AI training and inferencing, DeepSeek’s relatively lower computing power requirements could also open the door for other players to compete in the market. This could benefit AMD to an extent. If demand for high-performance GPUs potentially eases, AMD’s more affordable AI accelerators could become a good alternative for companies looking for a more favorable price-to-performance trade-off. Moreover, if the costs of running AI models trend lower, this could drive broader adoption of AI in new use cases, helping semiconductor players in the long-run. Separately, AMD’s expertise with both CPUs and GPUs could put it in a unique position as computer hardware evolves. While traditional CPUs are becoming insufficient due to limits in handling complex, parallel-processing AI workloads, GPUs excel at these AI-driven applications. AMD’s dual expertise allows it to offer a comprehensive solution that integrates both CPU and GPU capabilities, enabling systems to efficiently balance general-purpose processing with accelerated computing tasks. This could give the company an edge, particularly in the PC market.
We have a $160 per share valuation for AMD, which is roughly 35% ahead of the current market price. AMD trades at just about 23x consensus 2025 earnings, which we believe is a reasonable multiple given AMD’s sales growth and prospects in the AI market. AMD’s revenues are projected to grow by about 26% by 2025. See our analysis on AMD Valuation: Is AMD Stock Expensive Or Cheap? for more details on what’s driving our price estimate for AMD. Also, check out our analysis of AMD Revenue for more details on the company’s key revenue streams.
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