Investors investing money into AMD on AI bets

Advanced Micro Devices (AMD) recently experienced its most impressive week since November, and it went on to surpass even the highly regarded AI-focused Nvidia as optimism surrounding the semiconductor industry’s growth intensifies. 

Closing at a record high on Thursday, AMD shares continued their upward trajectory with a 7.1% increase on Friday. Notably, they have surged by approximately 65% since October, outperforming both Nvidia and the Philadelphia Semiconductor Index during this period. 

Investors are expressing confidence in the substantial growth potential of semiconductor chips, with the belief that Nvidia will not be the sole beneficiary of this trend, according to David Wagner, a portfolio manager at Aptus Capital Advisors. There is a sense of a “catch-up trade” after Nvidia’s remarkable performance in the past year. 

The semiconductor sector, in general, received a boost on Thursday following better-than-expected fourth-quarter results from Taiwan Semiconductor Manufacturing Co., a key chip maker for Apple and Nvidia. Taiwan Semiconductor Manufacturing Co. anticipates a minimum revenue growth of 20% for the year after a downturn in 2023. 

AMD’s stock received an early boost in the week from analysts at Barclays, Susquehanna Financial, and TD Cowen, who raised their price targets. Barclays now holds the highest target at $200 (R3,827.19) per share, citing the potential for AI as a driving force. 

Despite the positive momentum, the average 12-month price target by analysts, around $150 (R2,869), suggests a potential 9% drop. This reflects the challenge faced by Wall Street in keeping pace with the stock’s recent surge. The average analyst price target was only surpassed by AMD’s stock price in December after months below that level. 

Nvidia’s continued popularity is attributed to its robust revenue growth, resulting in a more favorable valuation compared to many peers. Nvidia trades at about 28 times forward earnings, a premium to the semiconductor share benchmark at around 23. In contrast, AMD trades at a multiple of over 40. 

Some analysts caution that both AMD and Nvidia may be fully valued at this point, especially AMD, which needs to prove itself through earnings. Alec Young, chief investment strategist at MAPsignals, suggests it may not be an ideal setup for bullish investors currently. 

Should the chip makers’ rally lose steam, it could present an opportunity for those bullish on AI’s long-term prospects. Young recommends considering these stocks on any weakness, though chasing them at current levels may not be tactically wise. 

Despite a stall in the S&P 500 Index rally, the semiconductor sector’s strength at the start of the year underscores the enduring enthusiasm for AI, indicating that the narrative of AI having substantial room for growth remains intact. Will Rhind, CEO of GraniteShares, emphasizes that belief in AI signifies a broader opportunity, dispelling the notion that only a few companies will dominate the space.