AMD's Stock Surged 24% on Its OpenAI Partnership and Is Near an All-Time High. Is It Still a Buy?

AMD's stock surged 24% following an announced deal with OpenAI, potentially involving up to a 10% equity stake in AMD in exchange for AI chips, signaling a potential boost in its data center GPU ambitions. However, the deal's value is contingent on computing capacity build-out, and AMD's overall AI performance has lagged Nvidia, which is now strategically partnering with Intel on CPUs. Despite this positive news, analysts note AMD's valuation at 52 times forward earnings remains high relative to its growth trajectory and competitors, raising questions about its long-term buying opportunity.

Analysis

Advanced Micro Devices (AMD) recently announced a deal with OpenAI, involving stock warrants potentially equating to a 10% stake in AMD in exchange for its AI chips. This news triggered a significant 24% surge in AMD's stock price the following day, indicating initial market optimism regarding its AI ambitions. However, AMD's stock is still only approaching its early 2024 all-time high, contrasting sharply with Nvidia's 280% gain over the same period.

While the OpenAI deal is valued at approximately $33 billion based on AMD's current market cap, its realization is contingent on computing capacity build-out and vests in stages, making it less concrete than Broadcom's recent $10 billion firm order for custom AI accelerator chips, also linked to OpenAI. AMD's data center GPUs have historically struggled to compete effectively with Nvidia's offerings, with custom solutions from Broadcom emerging as stronger alternatives.

Further complicating AMD's position is Nvidia's new investment partnership with Intel, which could challenge AMD's potential advantage in CPU control for data center GPUs. Despite the OpenAI news, AMD's valuation stands at 52 times forward earnings, making it more expensive than both Nvidia and Broadcom, even with significantly lower growth rates. This elevated valuation, coupled with ongoing competitive pressures and the contingent nature of the OpenAI deal, suggests a cautious outlook.

Key Decisions for Investors

• Investors should critically assess AMD's 52x forward earnings valuation, which is higher than market leaders despite lower growth rates and significant competitive hurdles.
• Monitor the progression and vesting conditions of the OpenAI deal, as its substantial value is contingent on future computing capacity build-out rather than being a guaranteed order.
• Evaluate the competitive implications of Nvidia's new partnership with Intel in the CPU space, which could further challenge AMD's data center strategy.
• Exercise caution regarding new positions, as the recent 24% stock surge may have already incorporated much of the immediate positive sentiment from the OpenAI announcement.