Advanced Micro Devices (NASDAQ: AMD) has recently faced a setback as its stock dropped by 3.6% following a downgrade by Northland Capital. Investors have been on the hunt for the next big player in the artificial intelligence (AI) sector after witnessing Nvidia’s (NASDAQ: NVDA) remarkable performance in 2023, where the stock price tripled. AMD, known for its MI300X line of accelerator chips, has been considered by many as a potential candidate for the next AI powerhouse. However, Northland Capital’s recent downgrade has raised concerns and cast doubts on AMD’s prospects.
Cautionary words from Northland Capital
Northland Capital downgraded AMD to a “market perform” rating, sparking a decline in the company’s stock price. While Nvidia’s stock has surged over 200% in the past 52 weeks, including a 20% increase in 2024 alone, AMD’s stock has seen a rise of 127% during the same period. This performance gap has left many investors still believing that Nvidia is the frontrunner in the AI revolution.
Northland Capital’s cautionary advice stems from their belief that the AI revolution, while significant, may not be as massive as investors currently anticipate. In 2023, a rush among companies to secure high-powered chips resulted in excessive purchases, leading to an oversupply of AI chips. Consequently, the anticipated growth in AI chip demand might not materialize as rapidly as expected, with some companies now focused on managing their existing inventory.
Divergent predictions for AMD’s future
The predictions for AMD’s future in the AI market are diverging. While some analysts, like Melius Research, forecast that AMD’s data center revenue could reach an astonishing $15.5 billion by 2025, up from approximately $6 billion in 2023, Northland Capital believes it might take until 2027 for AMD to surpass the $16 billion mark in AI revenue. This discrepancy highlights the uncertainty surrounding the pace and scale of AMD’s growth in the AI sector.
Is it time to sell AMD stock?
Northland Capital’s downgrade does not imply a lack of confidence in AMD’s potential. They still believe that AMD can achieve substantial growth in the AI market. However, the key concern is that the stock may have already priced in much of this growth. At the moment, AMD is valued at a staggering 1,580 times its trailing earnings and is trading at more than double its value from a year ago.
With this in mind, Northland Capital advises investors to exercise caution, take a step back, and evaluate their investments. It might be prudent to wait and observe how events unfold before making further investments in AMD. The impending earnings report on January 29, 2024, could provide crucial insights into AMD’s performance and prospects.
Investor considerations
Investors contemplating whether to buy or hold AMD stock should carefully weigh the potential risks and rewards. While AMD has been a strong performer in the past, the current valuation may reflect overly optimistic expectations about its AI revenue growth.
Additionally, it’s worth noting that The Motley Fool Stock Advisor analyst team recently excluded AMD from its list of the top 10 stocks for investors to buy now. Instead, they identified other stocks they believe have the potential to deliver substantial returns in the coming years.
Investors should conduct thorough research and consider diversifying their portfolios to manage risk effectively. The AI market remains dynamic and competitive, and the long-term success of companies like AMD depends on their ability to adapt to changing market conditions and deliver on their growth promises.
While AMD’s recent downgrade by Northland Capital has caused a dip in its stock price, the AI sector’s future remains uncertain, and the pace of growth may not meet investors’ high expectations. It is advisable for investors to exercise caution, analyze the upcoming earnings report, and assess their investment strategies in light of the current market dynamics.
