Advanced Micro Devices (AMD, Financial) shares dropped 8% following the Q3 earnings report as the revenue outlook fell short of investor expectations amid the AI boom. Although its stock has risen by 155.8% since the end of the fiscal year 2022 due to the surging demand for AI chips, AMD has set a sales target of $5 billion for its AI chips by the fiscal year ending 2025. This target does not seem to reflect an ability to increase production at a rate that matches the rapidly growing demand. Furthermore, CEO Lisa Su has warned that chip supply constraints are expected to persist into the next year."
Stacy Rasgon, an analyst at Bernstein, said, “For an ‘AI name' such as AMD, even reporting within expectations is unpalatable, not to mention below.” He further noted that as much as the company's rate of AI performance is not bad, it doesn't seem geared for future market demand. Also, there would be more perceived risks related to conversations about ‘lumpiness' in 2025 business operations.
Similarly, other manufacturers in the wider chip industry, including Arm Holdings( ARM, Financial) and Qualcomm (QCOM, Financial), saw their shares plunge by more than 2%, while AI chip major Nvidia (NVDA, Financial) lost only 0.3%, suggesting investors were less concerned about similar problems affecting its operations. AMD and Nvidia rely on the same Taiwan Semiconductor Manufacturing Company for most of their state-of-the-art AI chip requirements.
With these changes, AMD upgraded its sales guidance for the fourth quarter this year. Yet, there is apprehension among Jefferies analysts about whether AMD can deliver on it, much less the Street estimates of between $8 and $9 billion in 2025. Since these announcements, at least ten analysts have decreased their target price for AMD; however, eight have increased it forward, bringing the attention of the median to $187.5, or an approximate 13% increase from its last closing price. Currently, the price-to-sales ratio for AMD stands at 2.03 while for Nvidia, it's 2.68, giving AMD a price/earnings ratio of 31.9 for trailing twelve month's forward earnings estimates while Nvidia's stands at 36.
