AMD: DeepSeek's Perceived Efficiency May Drive Demand For Cheaper AI Chips

Seeking Alpha02-02

SummaryAdvanced Micro Devices, Inc. has been overly sold off, attributed by its competitive AI accelerator offerings including Instinct MI300X, the upcoming MI325X, and MI350X.This is on top of the ...

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jislandfund
02-03
jislandfund
These models are being trained on already paid for llms so prices will naturally be less. As for this stock being a winner if they can shaje the high short trades it's a possibility.⭐

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Successful marketing strategy improving lead conversion. Business person turning knob to maximum income. Growth boost.AMD Is Inherently Undervalued, Offering Opportunistic Investors Rich Capital Appreciation ProspectsWe previously covered Advanced Micro Devices, Inc. (NASDAQ:AMD) in November 2024, discussing its discounted status due to its inability to compete directly with Nvidia's (NVDA) AI chip dominance, as observed in the former's underwhelming forward guidance.While the refreshed PC cycle and Enterprise contract wins might offer some optimism, we had believed that investors should observe the company's execution and the stock price movement for a little longer.AMD 1Y Stock PriceAMD 1Y Stock PriceSince then, AMD has lost another -18% of its value, greatly underperforming the wider market at +3.5% and many of its semiconductor peers. Part of the headwinds were naturally attributed to the painful DeepSeek revelation.DeepSeek's Training ProcessesDeepSeek's Training ProcessesEven so, it appears that DeepSeek may not be as cheap to develop indeed, despite the initial reports of training costs “at a much lower cost” of $5.6M, compared to Google (GOOG) DeepMind Gemini's training costs at approximately $191M and OpenAI's ChatGPT-4 at $78 million.While generative AI large language models, or LLMs, may be prone to “hallucinations,” it is widely speculated that DeepSeek may be using NVDA's H100 chips, instead of the lower performance H800 chips. This would validate Alexandr Wang's, CEO of Scale AI, postulation thus far:My understanding is that DeepSeek has about 50,000 H100s, which they can't talk about obviously because it is against the export controls that the U.S. has put in place. I think it is true that they have more chips that people than other people expect. But on a go forward basis, they are going to be limited by the chip controls and the export controls that we have in place. (Seeking Alpha.)DeepSeek's Training ProcessesDeepSeek's Training ProcessesThe same result has also been observed by numerous users. This is on top of the speculation that DeepSeek may have been trained through the same set of data and parameters by OpenAI's GPT4, which may have been why their performances have been (somewhat) on par.These reasons are likely why Microsoft (MSFT) is “investigating if a group linked to Chinese AI startup DeepSeek obtained data output from the ChatGPT maker's technology in an unauthorized manner,” with there being:“substantial evidence that DeepSeek distilled knowledge out of OpenAI's models. Distillation is a machine learning technique of transferring knowledge from larger AI models to smaller ones.”Even so, it is undeniable that DeepSeek has already deeply rattled the wider tech industry. It suffered a steep one-day sell-off with approximately $1T in market cap erased and certain stocks such as NVDA and Broadcom (AVGO) yet to recoup those losses.It is apparent that the market may be questioning the eventual return on investments from the billions of dollars already poured into expensive AI chips and new data centers built by the hyperscalers, along with the recently announced $500B Stargate project.These reasons are likely why AMD may stand to benefit from the ongoing carnage, especially since its AI accelerator offerings, Instinct MI300X, have been touted to offer the “Best Price-To-Performance Figures At GPT-4” on the market, as endorsed by MSFT's CEO, Satya Nadella.This conclusion is unsurprising indeed, given that AMD's MI300X comes with the price tag of $15K per GPU compared to NVDA's H100 at $40K per GPU.The same outperformance has also been observed in AMD's MI300X compared to NVDA's H200 series. This perhaps explains why Meta (META) has already exclusively installed AMD processors and GPUs to run “live traffic for Llama 405b,” allowing the hyperscaler/ social media giant to cost efficiently train their AI while driving improved outcomes.Most importantly, AMD has been “improving its competing software, called ROCm, so that AI developers can easily switch more of their AI models over to AMD’s chips,” to take market share from NVDA's “programming language, CUDA, which has become standard among AI developers.”This is on top of framing\"its AI accelerators as more competitive for use cases where AI models are creating content or making predictions rather than when an AI model is processing terabytes of data to improve,\"differentiating their offerings compared to those of NVDA's.The Lisa Su-led company has also launched the next-gen offering, Instinct MI325X. It had been slated to commence mass production from the end of 2024 onwards, on top of Instinct M1355X from H2 '25 onwards, as the direct competitor to NVDA's Blackwell.For now, AMD has already touted the MI325X to deliver\"80 percent higher memory capacity, 30 percent greater memory bandwidth and 30 percent faster FP8 and FP16 throughput than Nvidia’s H200 HGX platform.\"Despite the MI350's delay in scale manufacturing, compared to Blackwell from Q4 '24 onwards, we believe that AMD's next-gen offerings may offer a similarly promising price to performance ratio moving forward. This is given that NVDA's Blackwell comes with a hefty price tag at $35K per GPU, with AMD MI325X's/ MI350X's price currently undisclosed.If anything, AMD has already hinted that MI300X's and MI325X's gross margins are likely to be \"below corporate margins.\" This further underscores management's choice to undercut its competitors, particularly NVDA, which has reported a YTD gross profit margins of 75.8% (+5.9 points YoY).This is compared to AMD's YTD gross profit margins of 49% (+3 points YoY), allowing its offerings to be increasingly adopted by numerous hyperscalers, including META, MSFT, and OpenAI.The Consensus Forward EstimatesThe Consensus Forward EstimatesThese reasons are likely why the consensus forward estimates have been downgraded, with AMD expected to generate a decelerating top/ bottom-line growth at a CAGR of +19.3%/ +34% through FY2027.This is compared to the original estimates of +20.2%/ +37.4% and the historical growth of +34.7%/ +83.1% between FY2017 and FY2022 (before the PC demand destruction), respectively, with it underscoring the market's conviction surrounding its second fiddle prospects in the AI accelerator race.This is on top of the hyperscalers' ongoing development of in-house AI chips. AVGO guides an accelerated CAGR of +83.1% from its FY2024 AI accelerators/ networking revenue base from $12.2B in FY2024 to $75B at the midpoint in FY2027, with the same optimism also observed in Marvell's (MRVL) management.These developments underscore AMD's uncertain turnaround indeed, especially since we may see an overheating problem for AMD's offering moving forward, as similarly reported by NVDA. This is given that NVDA's Blackwell has a Thermal Design Power [TDP] of 1kW per GPU, higher than the H100 at 700W, compared to AMD's Instinct M325X at 1kW and MI300X at 750W.Combined with the lower demand for AMD's offerings, we urge readers to temper their near-term expectations, especially since it is uncertain when market sentiments surrounding the semiconductor industry may return to pre-DeepSeek levels.AMD ValuationsAMD ValuationsThese reasons may also be why AMD has been overly discounted to FWD P/E non-GAAP valuations of 35.33x, down from its 5Y mean of 42.04x.Even so, we believe that AMD's sold-off status may have been a boon indeed, since it has triggered a rather compelling FWD PEG non-GAAP valuations of 0.80x, down from the 5Y mean of 1.33x and the sector median of 1.81x.Even when compared to its direct peers, including NVDA at a FWD PEG non-GAAP valuation of 1.10x, AVGO at 1.50x, and MRVL at 1.81x, it is undeniable that AMD looks cheaply valued here, aside from Intel (INTC) at 0.47x.So, Is AMD Stock A Buy, Sell, or Hold?AMD 5Y Stock PriceAMD 5Y Stock PriceFor now, AMD has continued to chart lower lows and lower highs since the March 2024 peak, with bullish support seemingly yet to materialize.Part of the headwind may be attributed to the drastically higher short interest volume by +47.8% YoY, with it potentially triggering further volatility from the aggressive short sellers.On the other hand, the DeepSeek sell-off has only proved AMD's (potential) floor at the $110s ranges. It possibly signals brighter days ahead, assuming that the company can report a double beat FQ4 '24 performance while offering a robust FY2025 guidance in the upcoming earnings call on February 04, 2025.So far, its track record has been more than excellent over the past eight consecutive earnings calls, with FQ4 '24 earning results likely to be aided by MSFT's and META's ongoing capex ramp up.Based on the consensus FY2026 adj EPS estimates of $6.87 and the FWD P/E non-GAAP valuations of 35.33x, there appears to be more than double upside potential to our long-term price target of $242.70 as well. This is significantly aided by its growing x86 market share to 23.9% as of November 2024 (+2.8 points QoQ/ +4.5 YoY).As a result, we are cautiously upgrading the AMD stock to a Buy, with the caveat that investors only add if the $110s trading floor holds over the Q4 '24 earnings call. This is because the stock's lack of floor has always been a deterrence thus far.If it is any comfort, we have added a small position ourselves during the recent DeepSeek sell-off, given the promising recovery prospects in FY2025, based on the exciting Instinct MI325X and MI350X launches ahead.Our Buy rating comes with the warning that the stock is only suitable for those with a moderate risk tolerance. It is uncertain when AMD may be able to monetize its AI accelerator offerings at scale without having to sacrifice gross profit margins.Only time may tell.","kind":"news","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":399349702640112,"gmtCreate":1738522800042,"gmtModify":1738541770780,"author":{"id":"4186496110989302","authorId":"4186496110989302","name":"jislandfund","avatar":"https://community-static.tradeup.com/news/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4186496110989302","authorIdStr":"4186496110989302"},"htmlText":"These models are being trained on already paid for llms so prices will naturally be less. As for this stock being a winner if they can shaje the high short trades it's a possibility.⭐","listText":"These models are being trained on already paid for llms so prices will naturally be less. As for this stock being a winner if they can shaje the high short trades it's a possibility.⭐","text":"These models are being trained on already paid for llms so prices will naturally be less. As for this stock being a winner if they can shaje the high short trades it's a possibility.⭐","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/399349702640112","repostId":1120342971,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":10,"commentSize":1,"repostSize":0,"favoriteSize":2,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.30.2","shortVersion":"4.30.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1120342971"}