AMD's Stock Surge and OpenAI Deal Amplify AI Hype, Yet Valuation and Execution Risks Persist

What happened

AMD's stock rose 77.3% in 2025, significantly outperforming the S&P 500 and even Nvidia in the latter part of the year, driven by optimism around its AI accelerator roadmap. The recent news highlights a multi-year agreement with OpenAI to purchase 6 gigawatts of AMD Instinct AI accelerators, which AMD frames as a $120 billion revenue opportunity over five years, reinforcing its narrative as a key alternative to Nvidia. This deal aligns with the bullish scenario in the DeepValue report, where AMD secures anchor AI customers to validate its platform. However, the report cautions that AMD's current valuation of approximately 100x trailing P/E already prices in multi-year growth above 30% annually and sustained gross margins of 55-58%, with significant risks from Nvidia competition, ROCm software stickiness, and large fixed wafer commitments. Despite the positive momentum, the stock's performance and new deal do not fundamentally alter the underlying execution risks, such as potential delays in deployments or margin pressure from aggressive discounting.

Implication

The OpenAI agreement provides a tangible revenue pipeline that could support AMD's ambitious data center targets, but realization depends on timely deployment and adoption without cancellations or delays. However, with the stock trading at extreme multiples, any slippage in growth or margin targets—such as data center revenue falling below 20% YoY or gross margin under 52%—could trigger significant downside, as outlined in the bear scenario. Investors must monitor quarterly data center revenue trends and gross margins closely, as these metrics are early indicators of whether AMD can meet the high expectations priced into the stock. Additionally, the success of ROCm software and securing additional customer wins beyond OpenAI and Oracle are critical for sustaining the bull case and justifying current valuations. In the near term, the risk-reward skew favors trimming positions or waiting for a better entry point around $160, rather than adding exposure at current levels, given the limited margin of safety.

Thesis delta

The OpenAI deal strengthens the bull case by adding a major customer commitment, but it does not mitigate the core risks of high valuation, Nvidia competition, and execution challenges. The overall thesis remains unchanged: AMD is executing well but priced for perfection, making further upside contingent on flawless execution against lofty expectations. Investors should maintain a cautious stance until evidence of sustained growth and margin expansion materializes beyond current optimistic assumptions.