AMD's Stock Stands Out Among Other AI Companies. What Does It Say About the Market?

Many companies in the artificial intelligence (AI) sector have experienced a “re-rating” of their stock prices. This refers to investors assigning these stocks higher-than-usual price-to-earnings (P/E) multiples due to the excitement surrounding AI technology. However, this re-rating phenomenon hasn’t impacted all high-profile AI companies equally, and some have not seen the expected surge in valuation.

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One of the most notable exceptions is Advanced Micro Devices Inc. (AMD). According to a recent analysis by JPMorgan, AMD stands out as the only AI company in a sample group that currently has a lower P/E multiple compared to its five-year average. This makes AMD an outlier, as most AI-driven stocks have experienced upward adjustments in their valuation multiples.

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Meanwhile, Nvidia Corp. (NVDA), another major AI player, is also relatively low on the list of companies benefitting from the AI craze. Nvidia’s P/E multiple is only about 3% higher than its five-year average. This suggests that even though Nvidia has gained significantly from the AI revolution, its stock is not as overvalued compared to its historical levels as some other companies.

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These trends raise important questions about how investors view AI stocks. For those who believe AI represents a transformative technology that will reshape industries for years to come, both AMD and Nvidia may seem undervalued. From this perspective, these companies' shares could be considered cheap, given their potential to capitalize on AI advancements.

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Valuation Comparisons and Earnings Season

JPMorgan analysts, led by Samik Chatterjee, have pointed out a broader trend: the average valuation multiple of AI stocks in their sample group is elevated compared to historical levels. This is an important factor to keep in mind as companies head into earnings season. The analysts caution that certain AI-related companies may face high expectations that could be difficult to meet in the near term.

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The analysts highlighted optical companies in particular, noting that this sector carries one of the highest valuation premiums among AI-related stocks. While cloud companies’ strong spending could provide opportunities for revenue and earnings-per-share (EPS) growth, the high expectations attached to these companies could make it challenging for them to deliver immediate results that satisfy investors.

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One optical company mentioned by JPMorgan is Lumentum Holdings Inc. (LITE). The analysts have an overweight rating on Lumentum’s stock, indicating they see long-term growth potential. However, in a note published on Monday, they placed the company on a negative catalyst watch. The concern stems from its valuation, as the analysts believe it may be difficult for investors to gain the visibility they need to justify a view of $4 in EPS power in the near term. This warning suggests that Lumentum’s stock could be under pressure if the company fails to meet elevated earnings expectations.

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Another company flagged by JPMorgan is Qualcomm Inc. (QCOM). Although Qualcomm wasn’t part of the valuation screening conducted by the analysts, they have placed the stock on a negative catalyst watch as well. Like Lumentum, Qualcomm has an overweight rating, but the analysts are concerned about potential risks tied to the smartphone market. Specifically, they worry that trends in the smartphone industry could lead to a disappointing setup for Qualcomm’s March-quarter earnings. This is particularly relevant as Qualcomm derives a significant portion of its revenue from mobile devices, and any slowdown in smartphone demand could negatively impact its earnings.

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Positive Outlook for Dell and Amphenol

On a more positive note, JPMorgan analysts have placed Dell Technologies Inc. (DELL) and Amphenol Corp. (APH) on positive catalyst watches. These companies stand out in the AI and tech sectors for different reasons.

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In the case of Dell, JPMorgan is optimistic about the potential for a recovery in the company’s traditional infrastructure business. Dell’s Infrastructure Solutions Group (ISG), which includes servers and other hardware, could see strong growth, and its margins in this segment may improve. The analysts believe that this recovery could shift investor sentiment toward Dell, especially given recent concerns about AI server margins and their impact on earnings.

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For Amphenol, which specializes in electrical and fiber-optic connectors, JPMorgan analysts argue that investor fears have been exaggerated. Amphenol’s underlying market growth remains strong, and the company is well-positioned to benefit from increasing demand for its products. The analysts view the recent sell-off in Amphenol’s stock as an overreaction and expect the company to perform well in the coming quarters.

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Conclusion

Overall, while many AI companies have seen their stock valuations surge due to the technology’s growing influence, not all have benefitted equally. AMD, in particular, stands out for having a lower-than-expected valuation, while Nvidia’s stock remains close to its historical average. Meanwhile, certain sectors, like optical companies, face high expectations that could prove difficult to meet in the short term, raising concerns among investors.

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On the other hand, companies like Dell and Amphenol are showing promise in more traditional segments of the tech market. Their potential for growth, coupled with a more favorable risk profile, has led JPMorgan to issue positive ratings for both stocks. As earnings season approaches, the market will closely watch how these companies and others in the AI space perform and whether they can meet the high expectations set by investors.

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