Bank of America dissects the semiconductor giants: NVIDIA's 19 times PE becomes a valuation pit, AMD awaits a turnaround

According to the Zhitong Finance APP, in a recent research report, Bank of America Global Research conducted an in-depth analysis of the U.S. semiconductor industry, particularly focusing on the current status and future prospects of industry giants NVIDIA (NVDA.US) and AMD (AMD.US).

NVIDIA: Multiple Factors Leading to Performance Decline, but Long-term Value Remains Positive

Since the implementation of the H20 series product embargo against China on April 15, 2025, NVIDIA's stock price has plummeted by 14%, while the Philadelphia Semiconductor Index (SOX.US) and the S&P 500 Index (SPX.US) have declined by 8% and 4%, respectively, during the same period. Currently, four major factors are suppressing NVIDIA's stock price: first, sales in the Chinese market are restricted (accounting for 13% - 14% of total sales, but currently only 3% - 6% of data center business), although Bank of America believes that the related risks in the Chinese market have been adequately priced in by the market; second, the artificial intelligence diffusion rules set to take effect on May 15 may put 10% of sovereign sales at risk; third, gross margins are expected to return to the mid-70% range in the second quarter of fiscal year 2025, but will need to endure multiple sales reductions and cost pressures during this period; fourth, visibility on cloud service capital expenditures is low for fiscal year 2026.

Bank of America forecasts NVIDIA's earnings per share (EPS) for fiscal years 2026 and 2027 to be $3.97 and $5.74, respectively, fully considering the aforementioned risk factors. Despite facing numerous challenges, Bank of America reaffirms its "Buy" rating on NVIDIA. It believes that the current stock price volatility presents a better buying opportunity, although it has lowered the target price from $160 to $150 to reflect a lower EPS expectation based on a 26 times expected price-to-earnings ratio for fiscal year 2026.

From a valuation perspective, NVIDIA's current price-to-earnings (P/E) ratio is only 16.6 times. If calculated under the worst-case scenario (i.e., a 10% restriction from the artificial intelligence diffusion rules), its P/E ratio for fiscal year 2026 would only be 19 times, far below its historical median of 30 times and typical cycle low of 23 times. This indicates that even under more pessimistic expectations, NVIDIA's valuation remains attractive.

AMD: Performance Also Affected, Market Holds Neutral Stance

Based on a logic similar to that for NVIDIA, Bank of America has adjusted its sales and EPS expectations for AMD to reflect the impact of the MI308 series product embargo against China. AMD is expected to incur $800 million in inventory and reserve costs in the second quarter of 2025. Assuming a gross margin of -40% for fiscal year 2025, the remaining shipments of the MI308 series products during the remainder of 2025 could reach $1.33 billion, accounting for approximately 18% of its $7.5 billion - $8 billion data center GPU shipments and 4% of the company's total sales For the fiscal years 2026 and 2027, Bank of America expects the resistance faced by AMD to gradually diminish, assuming that the MI308 series products are the most advanced GPU products that can be sold in China and will gradually face more local competition. Additionally, starting from the third quarter of 2025, Bank of America slightly raised AMD's gross margin by 50 basis points to reflect the reduced dilutive contribution of the MI308 series products to the gross margin, while partially offsetting the cost increases due to potential tariffs and supply chain reshoring.

Bank of America has a "Neutral" rating on AMD, with a target price lowered from $110 to $105. This target price corresponds to a price-to-earnings ratio of 20 times, matching a price-to-earnings growth ratio (PEG) of 0.9 times, based on an expected earnings per share of $5.29 for the fiscal year 2026, which is generally consistent with the historical PEG range of 1-2 times for high-growth computing semiconductors.

Risk Radar: From Gaming Weakness to Manufacturing Dependence

Recently, the demand in the gaming market has continued to weaken, posing a direct threat to NVIDIA's traditional stronghold. According to Bank of America analysis, consumer willingness to spend on gaming equipment is declining, leading to a gradual reduction in NVIDIA's revenue share from the gaming market. Historical data shows that the gaming business once contributed about 40% of NVIDIA's revenue.

However, the current year-on-year sales decline in this sector is approaching 20%, dragging down the company's overall performance and exposing NVIDIA's potential vulnerabilities in its diversification process.

Moreover, the competitive environment for AMD is becoming increasingly harsh, facing fierce competition from NVIDIA, Intel (INTC.US), and a host of startups. NVIDIA continues to launch high-performance products in the GPU (graphics processing unit) field, consolidating its market leadership; Intel is making continuous efforts in the CPU (central processing unit) market, attempting to regain lost ground through technological innovation and product iteration.

At the same time, numerous AI (artificial intelligence) startups are also exerting pressure on AMD in specific niche areas with flexible market strategies and innovative technologies. Bank of America points out that AMD faces severe challenges in the competition for market share and needs to make greater efforts in technological innovation and market strategies to break through.

Additionally, AMD's excessive reliance on TSMC (TSMC.US) as a single supplier in the manufacturing process has become a significant hidden danger for its business development. Industry analysis indicates that TSMC undertakes almost all of AMD's chip manufacturing tasks. If TSMC encounters issues in its production process, such as insufficient capacity, technological bottlenecks, or supply disruptions, AMD's product delivery will be severely impacted.

Bank of America warns that this overly concentrated supply chain layout limits AMD's ability to respond to unexpected situations, increases its operational risks, and may lead to revenue losses and market share declines during supply chain fluctuations.

Finally, the competition between the United States and China in the technology sector is intensifying, bringing significant uncertainty to the semiconductor industry. The U.S. government has recently introduced a series of export control policies that restrict the export of key technologies, products, and related services to China, covering a wide range of areas, including high-end chip manufacturing equipment and advanced semiconductor materials According to reports, the United States has placed some Chinese companies and institutions on an export control list, hindering Sino-U.S. technological exchanges and cooperation. This tension may escalate further, leading to more export control measures, increasing operational costs and market risks for companies like NVIDIA and AMD, affecting their global business layout and long-term development strategies, casting a shadow over the stable development of the entire semiconductor industry.

Investment Insight: Seeking Certainty Amid Uncertainty

As NVIDIA and AMD face sales restrictions in the Chinese market, domestic semiconductor companies have welcomed a window of opportunity for development. NVIDIA expects its sales from the Chinese market to decline by about 4% in the fiscal year 2026, while AMD will also face similar pressures. This indicates that domestic semiconductor companies have the chance to fill this market gap.

Investors should closely monitor the breakthroughs made by these domestic companies in key technology areas such as GPUs (graphics processing units) and CPUs (central processing units). Particularly in high-end chip manufacturing and AI (artificial intelligence) applications, any breakthrough in technological bottlenecks could lead to significant market share growth and investment returns.

The "AI Diffusion Rules" introduced by the U.S. government have had a profound impact on the global semiconductor industry. Among NVIDIA's global customer footprint, 24% of sales come from non-China secondary and tertiary countries, including 18% from Singapore. In the worst-case scenario, up to 10% of these sales for NVIDIA may be restricted by the AI diffusion rules, resulting in its EPS (earnings per share) declining by an additional 14% and 11% in the fiscal years 2026 and 2027, respectively. This situation highlights the importance of chip designers that align with the export control framework.

Despite facing numerous challenges, NVIDIA's valuation remains attractive. During its performance pressure period, NVIDIA's forward P/E ratio is only 17.4 times, significantly lower than its historical 5-year median of 30 times, and even below the typical value of 23 times at the cycle low. This suggests that market panic may have overly amplified short-term risks, providing investors with an opportunity to buy leading companies at reasonable valuations.

The business models and financial performance of NVIDIA and AMD underscore the importance of a full industry chain layout. NVIDIA's total sales will decrease by 6% in the fiscal year 2026 due to the embargo on the H20 series products. Meanwhile, AMD expects its gross margin in the fiscal year 2025 to be significantly impacted, while its data center GPU shipments may decline. This indicates that companies with the capability to manage the entire industry chain from chip design, manufacturing to software platform development can better cope with market fluctuations and policy changes