AMD Isn't the Next Nvidia—Yet

The Rise and Challenges of AMD in the AI Market

Advanced Micro Devices (AMD) has experienced a significant surge in recent months, fueled by growing optimism that it could become another major player in the artificial intelligence (AI) infrastructure space. Some investors even see AMD as a potential "Nvidia Part Two," a chipmaker capable of reinventing itself through the power of AI. However, despite this excitement, caution is warranted for those considering investing in AMD at current levels.

On Wednesday, AMD shares dropped 6.5% following the release of its second-quarter earnings results. While the numbers appeared solid on the surface—revenue for the June quarter exceeded expectations and the company provided a strong sales outlook—there are underlying concerns that suggest AMD's stock may not be as promising as it seems.

A Mixed Performance in Key Markets

Wall Street typically focuses on the data center as AMD’s most important end market, where its GPU and server CPU businesses operate. However, the revenue growth in this segment was modest, with a 14% increase compared to the previous year. This performance aligns with analysts' estimates but falls short of the 57% growth seen in the first quarter. In contrast, the gaming unit contributed significantly to the revenue upside, highlighting a shift in the company's focus.

The AI GPU business remains a key area of interest for investors. At AMD’s Advancing AI event in June, the company announced its latest AI chips, the AMD Instinct MI350 series, to compete directly with Nvidia. OpenAI CEO Sam Altman attended the event and expressed enthusiasm for AMD’s future roadmap, which raised investor expectations heading into the quarter.

Investor Optimism and Uncertainty

Investors have been increasingly optimistic about AI-related stocks as large technology companies have increased their capital expenditure spending plans during this earnings season. AMD shares have benefited from this trend, rising 44% so far this year and 73% over the last three months. In comparison, Nvidia shares have gained 33% this year and 57% over the same period.

However, during AMD’s earnings call, analysts sought clarity on whether the MI350 would capitalize on the robust demand for AI infrastructure. The response from management was vague, leading to a decline in stock price after hours. Analysts repeatedly asked for more details on the AI GPU business's second-half revenue outlook, but AMD CEO Lisa Su declined to provide specific forecasts. Instead, she emphasized a “steep” production ramp in the second half of the year and highlighted “significant interest” in the upcoming MI400 series.

The Road Ahead for AMD

The focus on the MI400 series makes sense given the evolving AI market. The industry is moving toward “full stack” rack-scale AI servers that integrate dozens of chips, networking, and software. Nvidia faced initial production challenges with its GB200 NVL72, which combines 72 GPUs in a single server rack, but it is now shipping in volume. The MI400 will be AMD’s first rack-scale offering, aiming to compete with such solutions.

However, the non-rack-scale MI350 is unlikely to be competitive with Nvidia’s current offerings. This means AMD investors may have to wait until next year for the MI400 to deliver meaningful revenue growth. There are also risks associated with AMD’s ability to build its first rack-scale AI server, similar to what Nvidia has already accomplished.

Valuation and Future Prospects

Given the uncertainty surrounding AMD’s AI GPU business, the stock appears fully valued. It trades at 32 times forward earnings, with a 32% revenue growth in the latest quarter. In comparison, Nvidia, which trades at a slightly higher 36 times forward earnings, is experiencing much faster revenue growth at 69%. Analysts believe that current Wall Street estimates for Nvidia may be understated, as its GB200/GB300 NVL72 is only now ramping up significantly.

For now, AMD shares represent a bet on the company’s future ability to deliver on its rack-scale AI server ambitions. Until the MI400 is successfully rolled out, which is expected to happen next year, the stock is likely to remain stagnant. Investors should carefully weigh the risks and rewards before making any decisions.