AMD stock surge analyst rating heck if we know

Analyst downgrades AMD due to overinflated expectations for AI chip growth, citing distorted demand signals and uncertainty about the company's future.

In a recent note, Northland Capital Markets analyst Gus Richard downgraded the valuation of graphics processing units (GPUs) to a "heck if we know" rating, expressing uncertainty about the future of AMD shares. The demand for AI-oriented GPUs has been on the rise, with AMD experiencing significant gains as investors anticipate the company's AI-oriented GPUs to compete with Nvidia and cater to big buyers like Microsoft and Meta.

However, Richard's skepticism stems from what he sees as inflated investor expectations for AI chip growth, leading to what he calls "irrational exuberance." He predicts total AI chip revenue of $125 billion in 2027, but notes that the range of expectations from various analysts is vast, ranging from $100 billion to $400 billion. This, in Richard's view, has led to distorted demand signals, with Nvidia being effectively a "sole source" for AI chips and demand outstripping supply.

Additionally, Richard points to factors such as customers "double ordering" due to supply constraints and recent U.S. moves to ban certain chip exports to China as potential obstacles to growth. He also emphasizes that while AI is significant, it may not be as big as investors are anticipating.

In his calculations, Richard estimates that if AMD were to sell $16 billion in AI chips in 2027, the company would have about a 13% market share. However, he believes that this figure is already priced into the stock, and that AMD would need to continue investing in research and development to keep up with Nvidia. As a result, he has downgraded the stock's rating to market perform, equivalent to a hold.

As a result of Richard's note, AMD shares experienced a 3.5% drop to $168.17, while Nvidia shares saw a modest increase. This indicates the impact of Richard's assessment on the market.