On Thursday, December 7, 2023, semiconductor chip powerhouse Advanced Micro Devices (NASDAQ:AMD) unveiled its newest line of chips designed for the artificial intelligence market, known as the Instinct MI300X APU (Accelerated Processing Unit). AMD claims that the MI300X will offer computing speeds up to 1.6 times faster than Nvidia’s current H100 HGX chip. Furthermore, AMD anticipates that these new chips will enable the company to capture a significant portion of the $400 billion total addressable market for AI chips, currently dominated by Nvidia with about 90% market share.
Now what does Wall Street have to say about that boast?
Morgan Stanley analyst Joseph Moore has released a report on the emperor’s new chips. Moore holds a favorable view of AMD stock, rating it as Overweight (i.e. Buy). Among the positives he cites, Moore says AMD has won “endorsements for MI300 from Microsoft, Oracle, Meta and others.” Moore also posited a $400 billion-a-year total addressable market for AI chips – a market that, as already stated, has been almost a wholly owned subsidiary of Nvidia to-date.
Relative to AMD’s current annual revenue of just $22 billion, that sounds like quite a big market opportunity.
Despite the positive tone of AMD’s press release and the accompanying event, it appears that Moore still harbors some reservations and reluctance to become overly optimistic about this development.
Well, such as the fact that AMD is saying the market for AI chips is $400 billion-big. Nvidia thinks the AI market’s size is only $250 billion, and AMD itself said $150 billion just a few months ago. What’s more, given that the entire semiconductor market, globally, currently stands at just $600 billion, AMD’s assertion of a “$400 billion” total addressable market in AI chips alone seems a bit aggressive.
A second issue worth highlighting is Moore’s presumption that most would-be buyers of AMD’s AI chips seem to hope it will be a “cost effective” alternative to Nvidia chips for use in AI inference operations. On the one hand, “cost effective” can be a good thing – helping AMD to break into a market that Nvidia currently dominates. On the other hand, “cost effective” might not be great news for profit margins.
And here’s one final point to consider: Current buyers of Nvidia chips might like the idea of having AMD serve as a potential alternative supplier of chips. But they might also not want to speak about this potential too loudly. The reason being, as Moore points out: “Customers are reluctant to endorse any NVIDIA alternative given the risk that it could reduce their allocations” of Nvidia chips.
Translation: There’s real worry out there that if an Nvidia customer makes it too public that it’s considering buying chips from AMD, then Nvidia might decide not to sell this customer all the Nvidia chips the customer might also want to buy.
Long story short: There’s an 800 lb. gorilla lounging about the AI chip market today, and AMD ain’t it.
Overall, the Street currently has a cautiously optimistic outlook for the chip giant. The analyst consensus rates AMD a Moderate Buy based on 25 Buys vs. 9 Holds. However, shares have had a bountiful 2023 and are up 99% year-to-date, and as such, the $129.45 average price target suggests they will stay range bound for the foreseeable future. (See AMD stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.