Introduction

Advanced Micro Devices (NASDAQ: AMD), often thought of as a frontrunner in the AI race, is facing a rocky road in the stock market this year. While the general market trend has seen an upward movement, AMD shares have slipped by a concerning 10% since the beginning of the year, raising eyebrows among investors.

Analyst Projections

Bank of America analyst Vivek Arya, recognized as one of Wall Street's top experts, has recently lowered his projections for AMD’s AI GPU revenue for the fiscal year 2025. His forecast now stands at $8 billion, a significant drop from his previous estimate of $8.9 billion. This cut is not only below his earlier expectations but also trails behind the Street’s consensus estimate of $9.6 billion. Such adjustments indicate that AMD is likely to maintain its approximate 4% share in the accelerator market, which is a substantial decline from Arya’s earlier forecast suggesting a modest increase to a 5% share in an over $200 billion market.

Market Challenges

Arya elaborates, "Even with our estimate showing a robust 54% year-over-year growth, the lack of prospects to surpass higher expectations from the market could continue to weigh on AMD’s stock, similar to what we’ve observed over the past year.”

One critical issue is that AMD's technological advancements are lagging behind its closest rival, Nvidia (NASDAQ: NVDA), by more than a year. This swift progression in Nvidia's offerings leaves AMD chasing shadows, especially as the latter lacks a competitive networking portfolio.

Cloud Partnerships

To make matters worse, AMD is reportedly grappling with challenges from Amazon, its largest cloud customer. Amazon appears to favor alternative solutions, such as its own custom-designed Trainium chips, developed in collaboration with Marvell, and products from Nvidia, indicating a waning interest in AMD's offerings. Similarly, Google is pivoting towards its own custom solutions like TPUs developed with Broadcom, reinforcing AMD’s struggle to secure significant cloud partnerships.

Opportunities Ahead

On a slightly brighter note, AMD has secured partnerships with notable customers like Microsoft, Meta, and Oracle. However, the upcoming capital expenditure demands from Nvidia's next-generation Blackwell architecture could critically hinder AMD’s chances of capturing more market share, as major players may prioritize Nvidia's products in their budgets. Arya foresees Nvidia commanding over 80% of the AI accelerator market, while the remaining market share will be contested between custom chips and AMD.

Analyst Rating Lowered

While Arya does acknowledge the potential for error in his downgrading thesis, he highlights AMD's opportunity to grow in the compute market, particularly in the PC/server segments, where it currently holds about 23% of the market share—a stark contrast to Intel, which dominates with 69%. Moreover, Nvidia’s supply constraints and high pricing might provide AMD with a unique chance to position itself as a viable alternative, especially for in-house cloud workloads.

As a consequence of these observations, Arya has lowered his rating for AMD from Buy to Neutral, and reduced his price target from $180 to $155, yet he emphasizes there remains an 18% upside potential from current levels.

Analysts' Consensus

The consensus among analysts leans towards the middle ground, with Arya being one of seven to exhibit caution, while 22 still advocate for Buy ratings, leading to a Moderate Buy consensus for AMD stock. Currently priced at around $185.46, the average price target suggests a potential one-year upside of approximately 42%.

Conclusion

Investors would do well to heed these insights and conduct their own thorough analyses before making decisions in the increasingly competitive semiconductor market. Will AMD rise from the ashes, or is it destined for further decline? The coming months will certainly tell.