Advanced Micro Devices‘ (NASDAQ: AMD) stock has shot up spectacularly in recent days. This is due to the fact that the chip designer has entered a major partnership with ChatGPT owner OpenAI.
Now, the stock does look a little expensive after its recent pop. However, Wall Street analysts seem to think it can go much higher.
A big deal
The OpenAI partnership’s certainly a big deal for AMD. Under the deal, the chip designer will provide its high-powered ‘Instinct’ GPUs to the artificial intelligence (AI) company as it expands in the years ahead, starting with an initial one gigawatt deployment (in the second half of 2026), and working up to six gigawatts over time.
For AMD, the deal’s likely to deliver “tens of billions” of dollars in revenue for the company and be “highly accretive” to earnings, according to CFO Jean Hu. And over the next four years, the ripple effect of the deal could generate more than $100bn in new revenue, according to management.
As for OpenAI, the deal will help it accelerate its infrastructure buildout. “This partnership is a major step in building the compute capacity needed to realise AI’s full potential,” said OpenAI CEO Sam Altman.
Note that as part of the agreement, the chip company has issued OpenAI a warrant for up to 160m AMD shares, structured to vest as specific milestones are achieved. In other words, OpenAI has the option to become a major shareholder in AMD in the future.
New share price forecasts
Now, I was expecting to see some share price target increases after this deal was announced. But I have to say I’m amazed at the magnitude of some of the increases.
Just look at these new forecasts:
| Firm | Old AMD price target | New AMD price target |
| Wells Fargo | $185 | $275 |
| UBS | $210 | $265 |
| Jefferies | $170 | $300 |
| Melius | $200 | $300 |
| Cantor Fitzgerald | $200 | $275 |
| Truist | $213 | $273 |
| Benchmark | $210 | $270 |
| Barclays | $200 | $300 |
Clearly, the deal’s a game-changer for the company, if Wall Street analysts are to be believed. Quite a few analysts see the chip stock now going to $300 (about 42% above its current share price).
Worth a look today?
Is the stock worth considering given this bullish sentiment? I think it probably is, assuming one has a long-term investment horizon.
As I said above, it looks expensive today. Currently, the forward-looking price-to-earnings (P/E) ratio’s about 52 (falling to about 35 using next year’s earnings forecast).
However, if the OpenAI deal brings in tens of billions in new revenue, earnings are likely to rise sharply in the years ahead. And this earnings growth could lower the valuation and propel the stock higher.
I’ll point out that AMD chips are used in other industries (eg home computing), so the company isn’t a pure play on AI. And weakness in these other industries could offset the potential growth from AI.
Overall though, I see quite a bit of long-term growth potential. So I think the stock’s worth a look right now.
