AMD (NASDAQ:AMD) stock has started off the year strong with the share price up nearly 50% YTD. They have been a market darling in the AI race, as the company plans to release their MI300 AI chips in 2024.
While AMD boasts impressive long term growth prospects in the AI GPU market, some factors suggest that the stock price might be inflated. This includes their price to sales ratio of 15 and their monstrous trailing P/E of 391. While those metrics are what you see at face value, there are certainly more concerns that may affect the share price over the next 12-18 months.
The Stock Won’t Be a Buy Anytime Soon
There are obviously many legitimate reasons why AMD stock has been receiving so much investor attention on Wall Street. Mainly, due to the company’s announcement regarding the anticipated release of their MI300 series AI chips for HPC and generative AI workloads.
AMD is heavily invested in the burgeoning artificial intelligence market. However, their AI chips are playing catch-up with market leaders like Nvidia (NASDAQ:NVDA), who hold more than 80% market share. Their MI300 series just began generating revenue, and it is only a fraction of Nvidia’s data center revenue.
While AMD stock has serious room for growth, translating hype into concrete earnings will take time. This delay could be a huge disappointment to Wall Street, and those now expecting outsized returns may have already missed the boat.
AI Hype Will Soon Rear Its Ugly Head
AMD’s stock has seen a meteoric rise over the last 5 months more than doubling from the October lows in 2023. While the performance is impressive, such rapid growth can be unsustainable.
The current share price might be pricing in a lot of future success, leaving little room for futher upside in 2024. If the company fails to meet its guidance for AI chip sales, the stock price could see a significant correction.
Furthermore, investors seeking exposure to the chip industry might want to consider alternatives. Nvidia, despite its larger market capitalization, boasts a stronger position in the AI GPU market, cheaper valuation, and a proven track record of profitability. Competition certainly exists, and analysts on Wall Street are far too optimistic about the 2024 fiscal year.
AMD Stock: Valuation is Out of Whack
AMD’s guidance for Q1 FY24 fell short of expectations, raising questions about their short term growth prospects. Additionally, AMD’s operating margins are declining and have remained incredibly inconsistent over the last several years.
Their growth trajectory over the next decade is undeniable, but its current share price might already reflect this future success. Any stumble in execution could leave investors holding the bag.
Even despite these circumstances, AMD stock has continued to go up day after day. However, long term investors should question AMD’s valuation and might want to consider holding off before deciding to pounce on the stock in 2024.
On the date of publication, Terel Miles did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
