Why Advanced Micro Devices Fell Today

Shares of chipmaker Advanced Micro Devices (AMD -6.97%) were plunging in Thursday trading, down as much as 7.8% before bouncing to a 7.4% decline as of 2 p.m. ET.

It appears as though today was a "sell the news" event following the stock's run-up ahead of the Nvidia earnings release yesterday, and ahead of Federal Reserve Chair Jay Powell's speech tomorrow in Jackson Hole.

In addition, AMD announced a new AI-focused software acquisition today. While that could be interpreted as a positive, it could also fuel sentiment that AMD is far behind Nvidia and in "catch-up" mode in AI.

It's hard to pinpoint an exact reason that AMD is falling today. But AMD and most other technology stocks somewhat related to artificial intelligence ran up ahead of Nvidia's earnings early in the week. So, there was perhaps anticipation of Nvidia's big earnings beat last night and therefore a "sell the news" trading dynamic today.

Nvidia's blowout earnings and guidance suggested booming demand for AI. Yet while AMD is looking to eventually compete with Nvidia in AI accelerators, its MI300 product probably won't make much of a dent in the market before next year.

Meanwhile, today AMD announced the acquisition of Mipsology, an AI start-up from France that develops AI software using AMD's computing resources. AMD noted in the blog post: "Mipsology's highly skilled software team has proven expertise in delivering AI software and solutions running on top of AMD adaptive computing silicon, and will join the AMD AI Group to help further accelerate our customer engagements and expand our AI software development capabilities. Specifically, the team will help develop our full AI software stack, expanding our open ecosystem of software tools, libraries and models to pave the way for streamlined deployment of AI models running on AMD hardware."

The acquisition, the financial terms of which weren't disclosed, could be interpreted as a positive, but could also fuel the thought AMD is in "catch-up" mode, in AI, with an uncertain outlook trying to breach Nvidia's formidable moat. Part of Nvidia's moat is its CUDA programming software ecosystem that is currently benefiting from strong network effects. AMD is clearly attempting to build its own software ecosystem, but is years behind in that regard.

At the same time, macroeconomic worries loom. Tomorrow, Federal Reserve Chairman Jay Powell will deliver his annual address at Jackson Hole. Last year, markets sold off following his speech, so there may be some nervous traders worried Powell may continue his hawkish stance. Given some recent signs of duress in the economy, such as rapidly rising credit card delinquencies that just surpassed pre-pandemic levels, some might worry the Fed's interest rate hikes will push the economy into recession.

While AMD has had a strong run in the data center and laptop chips over the past few years, all of its end businesses are likely to suffer in a recession. AI investment will continue, but if spending is tight, AI servers could merely displace investment in traditional servers, which is what we've seen this year. And of course, AMD still has big exposure to PCs and gaming, which would also suffer in a potential recession.

AMD investors are looking for the company to rebound from disappointing growth over the past year. That's why the stock is still up 57% on the year, even after this pullback. However, if the Fed pushes the economy into recession, AMD's recovery may take longer than expected.

AMD should eventually benefit from AI spending, but that could take time, and it's unclear how much market share it will take from the dominant Nvidia.