Shares in Advanced Micro Devices (NASDQ: AMD) have soared over 130% in the past year due to the unprecedented growth in the artificial intelligence (AI) sector. The advent of OpenAI’s ChatGPT in November 2022 spurred a surge in chip stocks as investor confidence in companies driving AI hardware development swelled. With the second-largest market share in graphics processing units (GPUs) and plans to roll out a new AI chip, AMD potentially possesses substantial prospects in the industry’s long run. However, market leadership does not unequivocally equate to favorable pricing.
AMD’s earnings do not yet mirror its substantial investment in the market, evident in its forward price-to-earnings ratio ascending 58% since last January to an exorbitant 45. Simultaneously, its free cash flow has plummeted 47% to just over $1 billion in the same period. Consequently, investing in AMD might carry more risk compared to AI stocks with superior valuation or stronger financial standing.
Data by YCharts
Comparative insights reveal AMD boasts the second-highest forward P/E among prominent AI firms, indicating its stock lacks the value offered by companies like Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC). Thus, exploring alternative stocks while awaiting AMD’s shares to achieve a more appealing price point appears prudent.
Here are two AI stocks that warrant consideration instead:
1. Microsoft
Microsoft emerged as a formidable force in AI with significant investments in OpenAI technology, empowering it with access to some of the startup’s most advanced AI models. The tech giant has leveraged OpenAI’s capabilities to solidify its position in the industry by integrating AI features across its product range.
In 2023, Microsoft bolstered its cloud platform Azure with new AI tools, incorporated components of ChatGPT into its search engine Bing, and enhanced productivity in its Office suite through AI.
Moreover, the company introduced an AI assistant, Copilot, as a $30 per month add-on to its Microsoft 365 subscription service, signaling potential revenue surges for Microsoft.
Boasting over $62 billion in free cash flow in 2023, Microsoft seems well-funded to sustain its AI investments and maintain a competitive edge. Coupled with a considerably lower forward P/E than AMD, Microsoft emerges as an astute AI investment for 2024.
2. Intel
Intel’s shares have declined by nearly 13% since its Q4 2023 earnings release on January 25. While the company reported a 10% year-on-year revenue increase, surpassing Wall Street estimates by $230 million, its bleak guidance resulted in a stock tumble. Intel’s projection for Q1 2024 earnings at $0.13 per share, compared to analysts’ forecast of $0.42 per share, alongside a revenue outlook of $12 billion to $13 billion (below the expected $14 billion) signifies the shift in the chip market amidst the AI boom.
Moreover, Intel faces increasing demand for server GPUs at the expense of central processing units (CPUs) due to the surge in AI. This reflects a transition from its historical dominance in CPU market share.
Despite these trials, Intel’s substantial investment in generative technology positions it for a resurgence over the next decade. The company’s forward P/E of 32 places it as one of the most attractively-valued AI stocks when juxtaposed with AMD, Nvidia, and Amazon. Thus, Intel presents an enticing option for 2024 and a demonstrably better value than AMD.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool recommends Intel and suggests options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.