Nvidia’s CEO Jensen Huang currently holds a dominant position in the emerging artificial intelligence chip market. Nevertheless, his competitive advantage may face challenges with the introduction of Advanced Micro Devices’ (AMD) MI300X AI chips later this year.
The extent to which AMD will capture the global AI market remains uncertain. However, recent regulations phasing out AMD chips from computer systems sold in China indicate that AMD is unlikely to surpass Nvidia in the Chinese market. Nvidia experienced a significant decline in sales in China after the U.S. government imposed restrictions on next-generation AI chip sales last fall.
China’s decision to restrict AMD chips has garnered attention from analysts, prompting them to revise their forecasts accordingly.
AMD aims to profit from surging AI spending
The launch of OpenAI’s ChatGPT has sparked significant interest in leveraging AI applications for various purposes, such as searching, parsing, and content creation. This has led to a surge in research and development activities in the field of AI.
Businesses across diverse industries are exploring the potential of AI to enhance their practices, processes, and revenue streams. For example, banks are utilizing AI to manage portfolio risks, manufacturers are assessing its impact on quality control and maintenance, retailers are exploring its use for theft prevention, and the healthcare sector is investigating its applications in drug development. Even the U.S. government is considering how AI can reshape military operations.
However, this increased activity has also revealed limitations in existing technology infrastructure. Traditional networks built around central processing units (CPUs) are proficient in basic tasks but struggle to efficiently handle the demands of training and running complex AI programs.
As a result, there is a growing demand for more powerful and energy-efficient servers equipped with graphic processing units (GPUs), particularly those manufactured by Nvidia. The superior capabilities of GPUs in meeting the needs of AI developers have led to a significant increase in Nvidia’s revenue. It is anticipated that AMD will also benefit from this trend with the availability of its MI300x AI chips.
According to Deloitte, the market for chips optimized for generative AI is expected to surpass $50 billion in 2024. Nvidia’s CEO, Jensen Huang, envisions the AI chip market reaching potentially hundreds of billions in value.
Similarly, AMD’s CEO, Lisa Su, has expressed optimism about the growth potential of the AI chip market. She expects sales of AMD’s next-generation AI chips to reach $3.5 billion this year, with projections indicating a market worth $45 billion by 2024 and potentially reaching $400 billion by 2027.
Advanced Micro Devices faces a China headwind
On March 24, the Financial Times revealed that China had introduced guidelines aimed at excluding Intel and AMD chips from government computers and servers. Instead, China intends to ensure that its systems utilize silicon manufactured by Chinese semiconductor companies such as Semiconductor Manufacturing International Corporation (SMIC), HiSilicon, and Yangtze Memory Technologies Corp. This move carries significant weight, considering that in 2020, China accounted for 54% of global semiconductor chip purchases, totaling approximately $240 billion.
Traditionally, China relied on imported high-end chips from Western suppliers, as its domestic production mainly catered to lower-end applications. However, this heavy dependence on foreign chips exposed China to potential vulnerabilities, including the risk of foreign technology being leveraged against its interests, as highlighted by concerns raised by the U.S. government.
In response, China has intensified efforts to foster the development of more advanced domestic semiconductor chips. With these chips now deemed ready for widespread adoption, China is actively promoting their use in domestically sold devices.
This decision echoes a similar move from the previous year when China mandated government employees to transition away from Apple devices in favor of smartphones supplied by Chinese companies like Huawei, HONOR, and Xiaomi. This shift significantly impacted Apple’s revenue in China, with sales declining by 13% to $21 billion in the fourth quarter.
Given that China accounted for 15% of AMD’s $22.7 billion revenue in 2023, the ramifications of its decision could be substantial for the semiconductor giant.
Analysts reset Advanced Micro Devices outlooks
The recent developments in the ongoing U.S. versus China technology tensions have drawn the attention of seasoned analysts Stephen Guilfoyle and Bruce Kamich from TheStreet Pro.
Guilfoyle, with decades of experience in stock picking since his time on the New York Stock Exchange floor, is closely monitoring AMD, which is his second-largest holding. He acknowledges the potential impact of the China-related news on investor sentiment regarding AMD’s valuation. If concerns arise and share prices decline, Guilfoyle may consider booking some profit. Despite being recognized as a key player in the generative AI revolution and a potential challenger to Nvidia, AMD’s forward earnings multiple of 53 raises questions about its valuation compared to Nvidia’s 39.
The recent decline in AMD’s stock price to around $180, down from a peak of approximately $227 in early March, places it around its 50-day moving average. Guilfoyle and many other investors monitor this moving average closely as a key indicator for buying or selling decisions. Guilfoyle highlights the potential risk if AMD breaks below this moving average, prompting risk managers to reduce exposure to long positions.
Kamich’s analysis of AMD’s stock charts reveals concerning signs, including the formation of a dramatic top reversal pattern. The On-balance volume (OBV) line indicates the early stages of a decline, while the Moving average convergence divergence (MACD) oscillator is nearing a downside crossover and a sell signal, signaling potential profit-taking.
Using point-and-figure charts, Kamich identifies divergent price targets. The daily P&F price target of $155 is worrisome for short-term investors, although the weekly P&F target of $358 offers reassurance to long-term investors, albeit subject to change based on future market movements.
While the China-related news may contribute to a potential decline in AMD’s shares, there’s a possibility of a recovery similar to Nvidia’s experience last October. Following the U.S. government’s announcement of AI chip restrictions, Nvidia’s shares initially fell by 17% before rallying by 144% since then.