What happened
The 2023 artificial intelligence (AI) hype train cannot be stopped. Shares of leading semiconductor company Advanced Micro Devices (AMD -2.61%) popped as much as 12.6% this week, according to data from S&P Global Market Intelligence.
As of this writing, the stock is up a whopping 65% year to date (YTD) and now sports a market cap of $170 billion, likely due to investor enthusiasm around the company's potential growth from the recent AI boom. There were no material updates from the company this week.
So what
With the growth of language learning models (LLMs) like ChatGPT, the excitement around AI has reached a new fever pitch. Microsoft invested $10 billion in OpenAI, while Alphabet continues to release products with new AI tools like Google Bard.
But what does this have to do with semiconductors and computer chips? It's simple. These new AI tools are very computationally intensive, meaning that they require many advanced (and expensive) computer chips to train and operate. This is spurring tons of demand for semiconductor makers who specialize in these products.
The leading AI chip company is Nvidia, whose stock is up an incredible 118% this year and now has a market cap of $775 billion. Yes, you read that correctly: Nvidia is now closing in on the value of technology giants like Amazon and Alphabet.
AMD is well behind Nvidia in AI computer chips but is thought of as the second-best company for these products. Investors are likely seeing this as a bullish indicator for AMD if this AI revolution takes hold. Some analysts project the world will spend over $1 trillion on AI by 2030, a lot of which will go to computer chips.
Now what
The best thing an investor can do with these soaring AI-related stocks is to not let the hype get to them. Yes, some stocks might soar 100% or more as we head into this bull market, and you might get antsy thinking there is easy money to be made quickly. These are dangerous thoughts that can lead to irrational investment decisions.
AMD stock -- compared to its market capitalization of $170 billion -- trades at around 17x its trailing-12-month gross profit, which is significantly higher than the market average. The company is also barely generating an operating profit right now, as the overall semiconductor industry has gone into a downturn after the pandemic boom. Even if the company will benefit from this AI boom, the stock still looks incredibly expensive at these prices, making it a risky bet to buy shares today.
