AMD just had its best week since November, outpacing even AI darling Nvidia as optimism builds anew around the semiconductor industry’s growth prospects.

AMD shares closed at a record high on Thursday and rose another 7.1% on Friday. They’re up roughly 65% since October, handily beating both Nvidia and the Philadelphia Semiconductor Index in that period.

Investors see huge growth potential for chips and expect that Nvidia “won’t be the sole winner”, said David Wagner, a portfolio manager at Aptus Capital Advisors. “Investors are looking for a catch-up trade” after Nvidia’s stellar performance in the past year, he said.

Semiconductor shares got a boost overall on Thursday from better-than-expected fourth quarter results from Taiwan Semiconductor Manufacturing Co. The main chip maker for Apple and Nvidia said it expects revenue growth of at least 20% for the year, after a slump in 2023.

AMD shares got a lift early this week when analysts at firms including Barclays, Susquehanna Financial and TD Cowen boosted their price targets.

Of those three, Barclays now has the highest target at US$200/share, raising it from $120 on the potential for AI as a driver. The stock traded as high as $167 on Friday. More than 70% of analysts covering AMD have a buy-equivalent rating.

In a sign of how Wall Street has struggled to keep up with the stock’s ascent, the average 12-month price target of around $150 implies a drop of about 9%. Some of that gap is due to AMD’s recent rally — the stock price only overtook the average analyst price target in December after months below the level.

AMD earnings

Analysts can also be slow to update target prices and ratings, especially in the weeks before an earnings release. Both AMD and Nvidia have upcoming earnings reports that will give investors a sense of their growth outlook for the year ahead. AMD releases results on 30 January, and Nvidia in late February.

The reason Nvidia has surged so much and continues to be a favourite is its booming revenue growth, which gives it a cheaper valuation than many peers. Nvidia trades at about 28x forward earnings, a premium to the semiconductor share benchmark at about 23. AMD trades at a multiple of more than 40.

Read: AMD to acquire AI software start-up in bid to catch Nvidia

“Those stocks are more than fully valued at this point, especially AMD,” said Alec Young, chief investment strategist at MAPsignals, adding that AMD has more to prove because earnings haven’t come through yet. “It’s not a good setup for the bulls right now.”

If the rally in chip makers fades, it could present an opportunity to those who are bullish on AI’s long-term prospects, Young said. “These are definitely stocks you want to buy on any weakness, but just tactically you probably don’t want to chase them here today.”

Still, the sector’s strength to start the year shows that the enthusiasm around AI that propelled chip-maker shares and the tech sector in 2023 hasn’t faded, even as a rally in the S&P 500 Index appears to have stalled.

“If you believe in AI then you believe in the broadening of the opportunity — it’s not just one or two companies that are going to take that share,” said Will Rhind, CEO of GraniteShares. “This is just reinforcing the narrative that AI has a lot more room to run.” — Carmen Reinicke, (c) 2024 Bloomberg LP