AMD Stock Rebounds. Is Its AI Edge Built to Last?
By Nov. 2, AMD (NASDAQ:AMD) had dropped about 28% from its Oct. 6 record close. Then, after the market closed yesterday, the chipmaker reported that its data center sales had nearly doubled from a year ago. It also forecast fourth-quarter revenue about two-thirds higher than the same quarter last year. The stock rose about 5% in pre-market trading this morning.
Team Rule Breakers recommended AMD in Stock Advisor on Jan. 18, 2024, at $162.67, weeks after the company launched its MI300 AI chips. At the time, AMD's edge over Intel in server processors was well established, and arguably its AI business had barely begun. The stock has roughly tripled since, and it's comfortably ahead of the S&P 500. Team Rule Breakers and Team Hidden Gems have recommended AMD across eight active Motley Fool services, and it has never carried a sell recommendation.
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The second of six Rule Breakers Traits is: Sustainable Competitive Advantage.
This trait asks how a company will keep beating its rivals over the next decade. The advantage can come from a network that gets more valuable as it grows, from patents, from strong leaders, or from rivals that fail to keep up. A company can also have a lasting edge in one business and little or none in another, as AMD's latest report indicates.
Where AMD Outbuilt Intel
For years, AMD and Intel (NASDAQ:INTC) have fought over the processors that run data center servers. AMD builds each processor from several small chips, called chiplets, and joins them in one package. Small chips tend to have fewer defects than one large chip, so more of them come out usable. That can help AMD sell more computing power per dollar.
Under CEO Lisa Su, AMD has steadily won share from Intel by many measures, and Intel's stock fell nearly 29% on Oct. 30 after a weak forecast.
Image source: The Motley Fool.
A Costlier Fight in AI Chips
AMD's position in AI chips is newer and likely less secure. It sells them to OpenAI, Meta Platforms (NASDAQ:META), Microsoft (NASDAQ:MSFT), and Oracle (NYSE:ORCL). Management expects AI sales to pass server processor sales for the first time this quarter. But AMD effectively paid to land two of its biggest deals.
It gave OpenAI and Meta warrants for up to 160 million shares each, or about 20% of its share count combined. The warrants are generally tied to how many AMD chips those customers deploy and to AMD's stock price.
Nvidia (NASDAQ:NVDA) still leads in AI chips. Developers have written software for its platform for nearly two decades, and moving that code to another chipmaker often takes time and money. Several big cloud companies also design their own AI chips, which could limit how much any outside chip seller can win.
How Durable AMD's Edge Looks
In server processors, AMD's moat appears to be a cost advantage. Its chip design has tended to deliver more performance per dollar than Intel could match. In AI chips, AMD doesn't seem to have a structural moat yet. Many customers probably buy from AMD partly so they don't have to rely on Nvidia alone, and AMD has used warrants to win some of that business.
The next few years will show whether AMD's big AI customers keep buying after their warrants vest, and whether its new rack-scale systems can narrow Nvidia's software lead. For now, the record quarter suggests those customers are buying in volume.
The Rule Breakers Team has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool has a disclosure policy.