AMD: Shares Undervalued as It Takes a Piece of the AI Pie

We maintain our $130 fair value estimate, narrow moat rating, and Exemplary capital allocation rating for Advanced Micro Devices AMD, as we continue to like the firm’s chances of carving out a decent position in the artificial intelligence accelerator chip market in the years ahead. With shares trading near $106, we view AMD’s shares as undervalued.

AMD is a digital semiconductor leader and is well positioned to prosper from a host of favorable trends in the data center, AI, and gaming. We think AMD benefits from intangible assets across a variety of products—traditionally from central processing units and field-programmable gate arrays, or FPGAs, acquired from Xilinx. However, AMD is one of two notable firms in graphics processing units, or GPUs, which are especially well suited for AI, and its GPU expertise may become increasingly valuable, and lucrative, in the years ahead.

We think AMD’s data center business should boom over the next few years, thanks to the rise of AI workloads within enterprises and leading cloud computing vendors. AMD pegs the total addressable market for AI accelerators, such as GPUs, at $150 billion by 2027. While we foresee Nvidia capturing the bulk of this value over the next several years, we surmise that all AI vendors and customers will seek alternatives to keep Nvidia’s dominance at bay, and AMD might be the best positioned company to emerge as a second source in AI.

AMD has benefitted from its outsourced manufacturing model, as its tight relationship with industry leader Taiwan Semiconductor, enabled AMD to grab a technological lead as its rival, Intel, stumbled with its internal manufacturing roadmap. We anticipate that AMD will continue to gain market share over the next three years as Intel strives to turn it around, but AMD’s gains could be longer lasting if Intel were to stumble further.