Question: How would you feel if you owned AMD stock and it fell by 60%, or even 80%, over the next few months? It sounds extreme, but it has happened before—and it could happen again. This year, AMD has struggled, falling about 18% since January, whereas the S&P 500 has stayed almost flat. The stock has been hindered by weaker-than-expected growth in its AI accelerator business, the launch of China’s new resource-light DeepSeek AI model—which might reduce GPU demand—and mounting macroeconomic concerns in the U.S. following President Donald Trump’s tariff impositions. We believe that the stock could decline further to as low as $40 per share. Here is why investors should be concerned.
The key point is that in an economic downturn, AMD stock could suffer significant losses. Evidence from as recently as 2022 shows that AMD stock lost over 60% of its value in just a few quarters. Could AMD’s roughly $100 stock drop to about $40 if a repeat of 2022 occurs? Of course, individual stocks tend to be more volatile than a diversified portfolio. In such an environment, if you are seeking upside with less volatility than holding a single stock, consider the High-Quality portfolio, which has outperformed the S&P 500 and delivered returns of over 91% since its inception.
Why Is It Relevant Now?
Although the generative AI wave has led to a surge in GPU demand, AMD’s AI accelerator business has not performed as well as anticipated. In Q4, AMD’s data center revenue—a proxy for its AI chip sales—reached $3.9 billion, falling short of consensus estimates. Furthermore, guidance appears weak, as the company indicated that data center sales for the current quarter are expected to decline by 7% sequentially. There are also concerns about the broader AI market, as companies may become more cost-conscious after years of excessive investment in AI infrastructure. The introduction of the DeepSeek AI model reduces the computing capacity required by generative AI models. Since DeepSeek’s model is open source, many large tech companies might adopt its methods to reduce costs. If widely adopted, this could temper the demand for AI computing power, potentially affecting GPU demand.
President Donald Trump’s trade war could also adversely affect companies like AMD. The Trump administration doubled the tariff on Chinese goods from 10% to 20% on top of existing levies. Last month, President Trump also hinted at the possibility of imposing a tariff of 25% or more on all semiconductor chips imported into the United States. Currently, AMD outsources most of its chip fabrication to Taiwan’s TSMC, and import tariffs could increase the cost of its products. AMD maintained gross margins of about 49% over the past year, indicating that the cost of its products—most of which are likely imported—exceeds 50%. In contrast, rival Nvidia reported an adjusted gross margin of approximately 75.5%, suggesting that the cost of its imported products is likely below 25% of its revenues. This implies that tariffs could more significantly impact AMD, forcing the company either to absorb the extra costs—thereby reducing margins—or pass them on to customers, risking a decline in volume.
Trump’s bold actions on tariffs and immigration have also sparked concerns about a potential resurgence of inflation. All of these factors suggest that the U.S. economy could face significant challenges, and potentially even a recession—our analysis here on the macro picture. Considering the heightened geopolitical uncertainty resulting from the new Trump administration’s bold actions, these risks are critical. After all, the Ukraine-Russia war continues, and trade remains uncertain. Tariffs increase import costs, typically leading to higher prices, reduced disposable income, and lower consumer spending. This scenario could negatively affect AMD’s core CPU business, as PC and laptop customers might postpone purchases, thereby diminishing chip demand.
How resilient is AMD stock during a downturn?
During some recent downturns, AMD stock has underperformed compared to the benchmark S&P 500 index. Are you concerned about the impact of a market crash on AMD stock? Our dashboard How Low Can Advanced Micro Devices Stock Go In A Market Crash? offers a detailed analysis of the stock’s performance during and after previous market crashes.
Inflation Shock (2022)
• AMD stock declined by 62.8% from a high of $150.24 on 3 January 2022 to $55.94 on 16 October 2022, compared to a 25.4% peak-to-trough decline for the S&P 500
• The stock fully recovered to its pre-crisis peak by 16 January 2024
• Since then, the stock rose to a high of $211.38 on 7 March 2024 and currently trades at approximately $100
Covid Pandemic (2020)
• AMD stock declined by 34.3% from a high of $58.90 on 19 February 2020 to $38.71 on 16 March 2020, compared to a 33.9% peak-to-trough decline for the S&P 500
• The stock fully recovered to its pre-crisis peak by 22 July 2020
Global Financial Crisis (2008)
• AMD stock declined by 87.6% from a high of $14.55 on 18 October 2007 to $1.80 on 25 November 2008, compared to a 56.8% peak-to-trough decline for the S&P 500
• The stock fully recovered to its pre-crisis peak by 27 February 2017
But given its extremely high valuation, the stock appears relatively expensive, which supports our conclusion that AMD is an expensive stock to buy.
Premium Valuation
In summary, it does not help that AMD stock remains expensive, trading at nearly 30 times trailing earnings. Certainly, Advanced Micro Devices’ Revenues have grown significantly in recent years, increasing at an average rate of 17.8% over the past 3 years (compared to 9.8% for the S&P 500). However, this growth could quickly diminish if the economy deteriorates and tariffs are imposed on AMD’s products.
Given the slowdown in growth and broader economic uncertainties, ask yourself the question: do you want to hold on to your AMD stock now, or will you panic and sell if it falls to $50, $40, or even lower levels? Holding on to a declining stock is never easy. Trefis collaborates with Empirical Asset Management—a Boston-area wealth manager—whose asset allocation strategies yielded positive returns during the 2008-09 period when the S&P lost over 40%. Empirical has integrated the Trefis HQ Portfolio in this asset allocation framework to provide clients better returns with less riskcompared to the benchmark index—resulting in a less volatile experience, as evidenced by the HQ Portfolio performance metrics.
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