AMD is the latest company to show that AI is an expensive proposition

By Emily Bary

AMD discussed increased investment spending to support its artificial-intelligence product portfolio

Artificial intelligence is expensive for the companies buying AI chips, and it's expensive for the companies making them, too.

That's one takeaway coming out of Advanced Micro Devices Inc.'s (AMD) latest earnings, which came with talk of increased investment spending to support the company's AI product portfolio. The gross-margin profile for AMD's data-center graphics processing units is lower than the general data-center gross-margin level as the company puts money toward its AI ramp.

AMD shares fell 9% in Wednesday trading.

"At the heart of investor disappointment is lack of earnings leverage upside vis-à-vis consensus for all of [calendar 2024]," Cantor Fitzgerald's C.J. Muse wrote in a note to clients.

While the ramp for AMD's MI300 accelerator looks "truly impressive," the company is limited by supply constraints, thus capping its opportunity in the face of high investor expectations, Muse wrote. He kept his overweight rating on the stock but cut his price target to $170 from $190.

Baird analyst Tristan Gerra also flagged the company's "costly" MI300 ramp, although he noted it should provide a nice payoff in the end.

AMD slightly boosted its outlook for MI300 revenue for this year, but Gerra's earnings estimates for the year "are coming down on higher-than-expected operating expenses as AMD invests in AI platforms including next-gen architectures and software," he wrote.

Don't miss: AMD boosts its outlook for AI revenue, but stock still falls

The "MI300 platform is expected to retain a lower gross margin profile than [the average data-center] total for some time due to current heavy AI investments, and is expected to be accretive over time," Gerra added, as he kept his outperform rating and $200 target price.

AMD's talk about the cost of its investment ramp comes as cloud companies that purchase AI chips have also recently shown Wall Street that building out AI is an expensive game. Meta Platforms Inc. (META) was among the companies that just boosted their capital-spending outlooks for the year, reflecting expectations for heightened AI hardware purchases.

Read: Meta earnings weigh on Magnificent Seven stocks. Here's why investors shouldn't panic.

Analysts are generally bullish on AMD shares, with 39 of the 49 tracked by FactSet having buy-equivalent ratings. As such, the stock found plenty of defenders in the wake of the results.

AMD shares fell after the company's last report as well, when MI300 sales guidance failed to live up to lofty expectations.

"Post that reaction, we noted that in our view investors were missing the forest for the trees as the raised guide should have been viewed as AMD solidifying its position as the primary alternative to [Nvidia] (NVDA) in the AI accelerator market," Wedbush's Matt Bryson wrote. "And, our opinion remains the same this time around with both AMD's increased forecastand strong apparent [first-quarter] growth in accelerator sales again highlighting AMD's solid positioning in the AI space."

He has an outperform rating and $200 target price on the stock.

See also: Why Super Micro's stock is falling despite an upbeat growth outlook

-Emily Bary

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05-01-24 1648ET

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