How AMD Stock Falls To $80

Forbes

2 days ago

AMD stock (NASDAQ:AMD) has had a strong run this year so far, rising nearly 35% since early January, driven by recovering CPU demand and investor enthusiasm around generative AI. But with the stock now trading at a lofty 42x forward earnings, investors may want to pause and ask: how much of this valuation is justified, and how much is riding on high expectations? Here's the thing, a 50% drawdown from current levels would not be unprecedented. It happened in 2022, when AMD stock lost over 60% of its value in just a few quarters. With the stock now around $163, a return to $80 levels isn't out of the question. And after a mixed Q2 earnings report and mounting macroeconomic pressures - including tariffs under President Donald Trump - a reality check may be in order. See our counter scenario on AMD Stock upside to $330. Indeed, we believe this broad range of upside and downside potential represents a simple fact, that AMD is a pretty volatile stock.
Valuation Rests on AI Hope. But Are Things Going To Plan?
A key driver of AMD's premium valuation is its potential in the AI chip space. However, Q2 revenues from the company's data center division, which houses its AI accelerator business, fell short of expectations with revenue rising just 14% to $3.2 billion. What's worse - AI chip sales appear to have declined year-over-year, held back by export restrictions to China and a pause as customers await the next-gen Instinct MI350. Compare this with Nvidia, which reported over 70% growth in its data center business to $39 billion last quarter. AMD's AI efforts remain a distant second, and it may be missing out on a significant chunk of the capital pouring into generative AI infrastructure. Should you buy or fear AMD stock?
For perspective, Amazon, Meta, Microsoft, and Alphabet together spent roughly $222 billion in capex in 2024, projected to surge to $360 billion in 2025. AMD's inability to capture a larger share of that spend raises concerns about whether its AI narrative can continue to support such a high multiple. There are some positives as well. The Trump administration recently eased restrictions on AMD's MI308 chip shipments to China, which could provide a near-term revenue boost. However, Nvidia's entrenched position - bolstered by its proprietary CUDA software ecosystem - makes customer switching harder and limits AMD's upside.
AI Spending Sustainability, Competition
There are also broader risks to the AI story. Despite massive infrastructure spending, most companies have yet to figure out compelling monetization models for AI. Shareholder pressure could eventually mount to improve returns, and this could cause tech giants may slow their GPU spending. Meanwhile, many of the big tech companies are building their own custom AI chips. Google has its TPUs, Microsoft is rolling out Maia, Amazon has Trainium and Inferentia, and Meta is building in-house silicon optimized for its own AI workloads. These in-house efforts could reduce dependency on AMD (and Nvidia), and could meaningfully reduce their addressable market.
Even if the GPU story stumbles, could AMD fall back on CPUs? Not without challenges. AMD's bread-and-butter PC and server CPU businesses could face pressure as the U.S. economy softens. Inflation remains elevated, job growth is moderating, and President Trump's new tariffs on key trading partners risk driving up costs, dampening consumer spending and business investment alike. That could impact PC sales and in turn hit CPU revenues.
How resilient is AMD stock during a downturn?
AMD stock has fared worse than the benchmark S&P 500 index during some of the recent downturns. Worried about the impact of a market crash on AMD stock? Our dashboard AMD Dropped 6.4% In A Day. Have You Fully Evaluated The Risk? has a detailed analysis of how the stock performed during and after previous market crashes.
Inflation Shock (2022)
• AMD stock fell 65.4% from a high of $161.91 on 29 November 2021 to $55.94 on 14 October 2022, vs. a peak-to-trough decline of 25.4% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 18 January 2024
• Since then, the stock has increased to a high of $211.38 on 7 March 2024 and currently trades at around $163.
Covid Pandemic (2020)
• AMD stock fell 34.3% from a high of $58.90 on 19 February 2020 to $38.71 on 16 March 2020, vs. a peak-to-trough decline of 33.9% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 22 July 2020
Global Financial Crisis (2008)
• AMD stock fell 91.2% from a high of $20.35 on 1 January 2007 to $1.80 on 25 November 2008, vs. a peak-to-trough decline of 56.8% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 21 August 2018
Premium Valuation
In summary, it also doesn't help that AMD stock is still expensive; it trades at almost 49x trailing earnings and 42x forward earnings. Sure, Advanced Micro Devices' Revenues have grown considerably over recent years, rising at an average rate of about 15% over the last 3 years (vs. 5% for S&P 500). However, this growth could fade quickly if the economy takes a turn for the worse and if the company fails to meaningfully capture share of the AI chip market. At current multiples, even modest disappointments could trigger an outsized correction in the stock.
The rich valuation of AMD stock limits its upside potential in the near-to-mid term. As an alternative, the Trefis Reinforced Value (RV) Portfolio, which has outperformed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to produce strong returns for investors. Why is that? The quarterly rebalanced mix of large-, mid- and small-cap RV Portfolio stocks provided a responsive way to make the most of upbeat market conditions while limiting losses when markets head south, as detailed in RV Portfolio performance metrics.