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edit: fixed the table
Before anyone brings up Tesla: I know their P/E ratio is somewhere in the 400s. But at this point Tesla is pretty much Elon Musks personal cult. The valuation is purely fueld by hopium and fanboys that see Musk as the saviour of humanity.
I am a long time investor in AMD. I bought them around the launch of Zen3 and RDNA 2 (13k) and I genuinely think it is a solid business with potential for growth, not just a meme stock. That being said the current rally really makes me anxious as fuck. The more I dig in, the more my senses tell me SELL.
My main point of comparison is Nvidia. I've gone through Nvidia's announcements and earnings reports from the early AI ramp up and compared them with AMD's recent AI and rack-scale compute announcements. My rough estimation is that AMD today may be in a position somewhat similar to where Nvidia was roughly 1.5–2 years ago. However, AMD's current valuation is still very bullish!
I hate to glaze Nvidia, but please bear with me!
tl;dr for the next segment: Nvidia had OpenAI, Microsoft, Google, Amazon, Meta, Antropic and everybody that wanted to build an AI by the balls. They just sold their hardware to the highest bidder.
Nvidia achieved the 5T market cap by consistently exceeding expectations quarter after quarter. Due to developin CUDA for a decade, Nvidia had a pretty wide moat when it comes to AI hardware. Pretty much everything AI was built to run on Nvidias hardware and switching would take a lot of time. Something that none of the hyperscalers could afford at the time. So they all bid for the hardware and Nvidia gave their chips to whoever was willing to pay the most. This was truly unrepresented demand from the biggest corporations in human history.
In the past couple of months the market is increasinly looking for alternatives. In some cases they build their own chips such as Google with their TPUs or Amazon with their Trainium. Other hyperscalers without prior chip design experience, such as Microsoft and Meta, are going to the next best GPU designer, which is AMD.
This is where the parallels to Nvidia from 2 years ago start breaking off. To understand what I mean, let's take a look at Nvidias and AMDs top of the line chips for AI data centers.
||AMD MI355X|Nvidia B200|
|:-|:-|:-|
|Process Node|TSMC N3|TSMC 4NP|
|HBM Memory|288 GB HBM3E|192 GB HBM3E|
|Memory Bandwidth|8 TB/s|8 TB/s|
|AI Compute (FP4)|\~10 PFLOPS|\~9 PFLOPS|
|Power Draw|1400 W|\~1000-1200 W|
Purely spec wise AMD has the superior product. More HBM memory, more advanced node, more PFLOPS. And for certain AI tasks AMD is actually better than Nvidia, despeit the CUDA moat.
But let's talk about the elephant in the room: pricing. This is where I have to speculate again, because pricing is very opaque for both companies. I'm no JP Morgan analyst so please cut me some slack. Estimates generally place the B200 somewhere around 30k to +45k per accelerator. AMD has not publicly disclosed MI355X pricing, but everything we know suggests it is being sold at a discount to comparable Nvidia hardware. If I had to put a number, I'd pick 15k to 25k.
So in simple terms: AMD is producing their chips on a more expensive node. They puts more HBM memory on their cards. That HBM is currently sold at a premium due to unforseen demand (just look at SK Hynix, Samsung and Micron). And they sell the end product at a lower price than Nvidia. It doesn't take a genius to see that the profit margins are gonna be nowhere near Nvidias from the past 2 years.
But it gets worse...
Our beloved CEO Dr. Lisa Su has a remarkable track record when it comes to predicting future numbers. Most of the times projected quarterly numbers are either on point or slightly above. So for this segment I'm gonna take Lisas word for it.
>"AMD expects the market for the company's data center chips to grow to $1 trillion by 2030"
Even if we assume that this prediction will come true, how much of that TAM can AMD realistically capture? Nvidias CUDA is still forcing many hyperscalers to buy their chips. AMDs ROCm still has to catch up. On the other hand other hyperscalers are building their own chips.
To come back to the crazy P/E ratio, AMD needs to roughly 5x their current annual profits in to come to a similar P/E ratio to Nvidia, TSMC, Apple, ect. of 30-45. Scaling todays profitability this means that AMD has to make rougly 200B in revenue annually or 20% of the 1T TAM.
Can Dr. Lisa Su do that? How much of the 1T TAM can they capture? How much of that revenue results in profit? Is the market seeing something that I don't? What am I missing?