Shares of Advanced Micro Devices (AMD) tumbled in premarket trading on Monday after investment firm Morgan Stanley downgraded the chipmaker, expressing concerns that investor expectations for its artificial intelligence (AI) business are excessively optimistic.


The downgrade, from Overweight to Equal Weight, was accompanied by analyst Joseph Moore maintaining his $176 price target for AMD.


Focus on Strong Product Line, But AI Clouds Outlook


While acknowledging AMD’s “strong product lineup” and its anticipated gains in the client and server CPU markets this year, Morgan Stanley’s analysts believe that the exuberance surrounding the company’s AI prospects overshadows reality.


“We like the AMD story, but investor expectations for the AI business still seem too high to us,” Moore stated in an investor note.  The analysts elaborated that with current expectations already factoring in significant growth, “limited upward revision potential for AI from here” exists.


AMD vs. The Competition: A Tough Comparison


The report highlights AMD’s potentially inflated valuation compared to its AI peers, particularly Nvidia (NVDA) and Broadcom (AVGO).  According to Morgan Stanley, AMD appears “expensive relative to other large cap AI plays” where they foresee “more confidence on upward revisions to AI forecasts.”


AMD’s AI Revenue Target: Reaching Expectations or Falling Short?


Morgan Stanley acknowledges AMD’s projected achievement of its $4 billion AI revenue target for 2024. However, the analysts contend that investor expectations significantly surpass this figure, potentially reaching “north of $6bn.” This discrepancy stems from a difference in how revenue is projected.


While the buy-side heavily relies on supply chain forecasts, Morgan Stanley emphasizes the time required to build an AI ecosystem. They believe AMD’s more measured approach, focusing on long-term viability over immediate gains, is a more prudent strategy.


Nvidia’s Blackwell Launch: A Potential Game Changer


The report further underscores the potential impact of Nvidia’s upcoming Blackwell launch on the AI landscape.  According to Morgan Stanley, investor expectations haven’t fully grasped the competitive pressure Blackwell will exert, potentially hindering AMD’s growth.


Moreover, the analysts highlight the distinction between AMD’s current focus on AI inference revenue compared to Nvidia’s broader reach across various AI segments.


Morgan Stanley’s New Favorite: Broadcom Enters the Ring


Adding another layer to the AI chip landscape, Morgan Stanley initiated coverage of Broadcom (AVGO) with an Overweight rating and a $1,658 price target.  This move positions Broadcom as their second-preferred company in the AI semiconductor space.


Conclusion: A Call for Measured Optimism


Morgan Stanley’s downgrade serves as a cautionary tale for overly optimistic investors in AMD’s AI ambitions. While acknowledging the company’s strong fundamentals and potential market share gains, the report emphasizes the need for a more realistic assessment of the AI sector’s growth trajectory. The upcoming months will be crucial in revealing whether AMD can successfully navigate the competitive landscape and meet, or even exceed, investor expectations.

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