“We like the AMD story, but investor expectations for the AI business still seems too high to us,” said analysts led by Joseph Moore

Advanced Micro Devices (AMD) The stock has recently received a downgrade from Morgan Stanley to a 120 target price in a note that accused investor enthusiasm for the chipmaker’s artificial intelligence business as overdone. The analysts at Morgan Stanley say that while AMD does seem to have much potential, they fear that the current AI hurdle is set too high for the company and in this regard, other companies that are more desirable for the investors are NVidia.

Key Points:

• Downgrade Reason: AMD has been downgraded mainly due debt related to high expected revenue growth of its AIBusiness which according to Morgan Stanley Research is over exaggerated and cannot be realized in the near future.
• Comparative Advantage: They are advising that there could be faster growth probably with bigger organizations such as Nvidia Corp which offers the biggest market share of AI chips.
• Current Market Position: This and the positive outcomes noticeable in the recent past, such as the release of AMD’s Instinct MI300X chip, make Morgan Stanley approach the situation with caution. They also point out that while the new offer – the MI300X – is quite groundbreaking, the aim of to capture as much as possible of the AI market, which AMD reportedly started in $400bn , is quite a difficult task.
• Market Realities: At the moment, the presence of AMD in the AI chip market is insignificant as compared to Nvidia occupying almost 90% of the market share. Some investors might have the impression that this situation can easily change in the short term and that AMD will be capable of reducing this gap drastically.

Analyst Insights:

• Joseph Moore, Morgan Stanley: Moore acknowledges AMD's strong long-term potential but advises caution against overly optimistic short-term expectations. He highlights that the AI ecosystem's development will take time and that immediate financial benefits may not meet high investor expectations.
• Market Performance: Despite AMD's stock rising by over 75% since the last earnings report, Moore suggests that expectations for the MI300 chip sales are premature. He emphasizes a preference for Nvidia stock in the current market environment due to its established dominance and robust infrastructure.

Broader Market Implications:

• AI Market Growth: The AI chip market is expanding rapidly, driven by increasing demand for advanced computational power. However, the market is highly competitive, with established players like Nvidia setting high benchmarks.
• Future Outlook: Analysts are divided on AMD’s immediate prospects. Some remain optimistic about the company’s long-term growth in the AI sector, while others caution against assuming rapid market penetration.

Conclusion:

Specifically, Morgan Stanley’s move to lower its recommendation for Advanced Micro Devices stands as an example of how tough it is for firms to deliver on lofty expectations by investors in the context of the transforming AI market. Although, AMD has shown much promise in its new line of chips designed specifically for AI applications, the journey of AMD to claim a substantial piece of the market share pie will continue to be a challenge because the AI field is replete with competition and the standards set in this new frontier by such big players such as Nvidia.