Bank of America resets AMD stock price target on deal with Meta
Summarize this article with:
Advanced Micro Devices (AMD) stock has lost about 18% in the past month, at the time of writing, Wednesday afternoon, Feb. 25, according to Yahoo Finance. Meanwhile, the SPDR S&P 500 index (SPY) is up about 0.4% in the same period.The stock crashed following its Q4 earnings report on February 3. It closed at $242.11, and the following day it closed at $200.19, losing about 17% in a single day.I covered the earnings in my article "Bank of America resets AMD stock price target as shares plunge." The main culprit behind the crash was disappointing guidance.However, while the stock hasn't been performing well in the recent period, the situation is very different when viewed over a longer time frame.The stock has gained a whopping 104% in the past year, while SPY is up only 16%. The company has a very competitive product in its Helios rack scale system, developed in partnership with Meta through the Open Compute Project. It can compete with Nvidia's Vera Rubin, at least when it comes to specifications. I wrote about Helios in my article "Analysts revamp AMD stock price after key conference."Getting companies to buy non-Nvidia AI accelerators is very difficult, thanks to its "CUDA moat." However, AMD has devised creative incentives to attract buyers, as seen in its recent deal with Meta. The partnership copies an unusual strategy AMD used to score a deal with OpenAI. Read the article “Analyst offers 3-word verdict on AMD, OpenAI deal” by TheStreet's Moz Farooque to explore the deal with OpenAI in more depth. Meta now expects to be a "lead customer" for next-gen AMD EPYC Venice CPU.Photo by VCG on Getty Images AMD and Meta expand partnership to deploy 6GW of AMD GPUsAMD and Meta (META) revealed on Feb. 24 that they are expanding their partnership. AMD has agreed to power Meta’s AI infrastructure with up to 6 gigawatts of AMD Instinct GPUs, paired with AMD EPYC CPUs.“We are proud to expand our strategic partnership with Meta as they push the boundaries of AI at unprecedented scale,” stated AMD CEO Lisa Su. Related: What Nvidia didn’t show at CES, and whether AMD should care“This multi-year, multi-generation collaboration across Instinct GPUs, EPYC CPUs, and rack-scale AI systems aligns our roadmaps to deliver high-performance, energy-efficient infrastructure optimized for Meta’s workloads, accelerating one of the industry’s largest AI deployments and placing AMD at the center of the global AI buildout.”As with the OpenAI deal, AMD has issued Meta a performance-based warrant for up to 160 million shares of AMD common stock, structured to vest as specific milestones associated with Instinct GPU shipments are achieved.Bank of America analyst Vivek Arya and his team updated their opinion on AMD stock following the announcement.Bank of America says deal with Meta could increase AMD 2030 EPS power by 13%-23%Arya noted that the equity giveaway raises important questions about the quality of the deal. However, he added that for the full dilution, the stock would need to work its way toward $600 per share, at which point the stock accretion might be a reasonable outcome for shareholders, regardless of dilution.The team said that each GW from the deal represents approximately $15 to $20 billion in net revenue opportunity for AMD or $6 billion in net income opportunity. This is why they estimate that EPS accretion could be 13% to 23% by 2030, even with up to 10% stock dilution, or up to approximately $25 in EPS power. This is significantly higher than the company's guidance for EPS in 2030 of more than $20.
More Tech Stocks:Morgan Stanley sets jaw-dropping Micron price target after eventNvidia’s China chip problem isn’t what most investors thinkQuantum Computing makes $110 million move nobody saw comingThe team believes AMD's announcement supports its opinion that CPUs are becoming increasingly important in AI inference. Arya noted that Meta had historically been a small AMD EPYC customer, but now expects to be a "lead customer" for next-gen Venice CPU. He added that Meta's CPU purchases are outside the realm of the 160 million share warrant structure which is only for 6GW of GPU installments. In a research note shared with me, Arya reiterated a buy rating for AMD stock and the target price of $280, based on 27 multiple of his estimate for non-GAAP EPS for 2027, which is toward the middle of AMD's historical range of 13 to 58.Analysts noted downside risks for AMD:Execution on first rack-scale product (MI400 Series) Timing/magnitude of Middle East AI projectsLumpy nature of consumer and enterprise spending that could create delays in acceptance and success of new productsHigh reliance on one outsourced manufacturing partnerMaturity of current game console cycleUpside risk:Greater share gain potential in the PC and server processor market against competitors.Related: Morgan Stanley tweaks AMD stock price target post-earnings