With the rise of the artificial intelligence (AI) era, hardware providers have been riding the wave of success, leaving software companies in their wake. Amid this backdrop, the stock of Advanced Micro Devices (NASDAQ: AMD) has surged by a remarkable 71% over the past year, reaping rewards alongside its shareholders.
However, facing a steep valuation and fierce competition from competitors like Nvidia, can AMD sustain its exceptional market performance? Let’s delve into what the next five years might hold for the chipmaker.
Navigating the Complex AI Terrain
Since its acquisition of ATI Technologies in 2006, AMD has directly challenged Nvidia in the realm of graphics processing units (GPUs). These advanced chips excel at multitasking and were initially designed for video game graphics before expanding into uses such as cryptocurrency mining and generative AI applications.
Under the leadership of CEO Lisa Su, AMD has shifted focus towards its GPU business, increasing the production of AI-capable MI300 Instinct chips for data centers this year.
Yet, even with this progress, it’s not a straightforward path to becoming the next Nvidia. Industry source Tom’s Hardware notes that AMD’s new chips sell for a quarter of Nvidia’s flagship H100 despite comparable performance levels, resulting in slower growth and narrower profit margins.
For context, AMD’s data center revenue in the fourth quarter rose by 38% year-over-year to $2.3 billion, whereas Nvidia’s data center division skyrocketed by 409% year-over-year, reaching $18.4 billion during the same period.
The Path Ahead: A Glimpse into the Next Five Years
By selling its cutting-edge AI GPUs at markedly lower prices than Nvidia, AMD might appear to be pursuing a strategy focused on affordability and value, typically associated with higher sales volumes. However, the reality is likely more nuanced.
Image source: Getty Images.
Nvidia has constructed a broad economic moat around its chips by creating an ecosystem of associated software like CUDA, a programming interface tailored for its hardware. Many companies have entrenched their AI infrastructure around Nvidia’s hardware, resulting in high switching costs and other hurdles in adopting alternative chips.
Moreover, Nvidia shows no signs of slowing down. In March, the company unveiled its Blackwell platform, engineered to train generative AI models at a fraction of the cost of its predecessors. Nvidia’s accelerated development pace could leave AMD playing catch-up, intensifying pressure on its pricing, growth, and profitability.
Over the next five years, while AMD may gradually gain market share, replicating Nvidia’s explosive growth seems improbable. AI chips are poised to be a significant but not transformative segment of AMD’s overall business landscape.
Investment Considerations for AMD Stock
With a forward price-to-earnings (P/E) ratio of 46, AMD’s stock is pricier than Nvidia’s, trading at only 35 times its anticipated earnings over the next 12 months. This valuation is hard to substantiate given Nvidia’s superior growth trajectory and stronger market position.
Nevertheless, the AI chip sector appears sizeable enough to support substantial long-term value for both companies, especially if this burgeoning technology lives up to analysts’ lofty projections. While AMD may not outpace Nvidia in the next five years, the company could still find a place in a diversified investment portfolio.
Considering an Investment in Advanced Micro Devices?
Before diving into Advanced Micro Devices stock, ponder on this:
The Motley Fool Stock Advisor team has pinpointed what they believe to be the 10 best stocks to invest in right now… and Advanced Micro Devices didn’t make the list. These 10 stocks have the potential to deliver substantial returns in the years to come.
Stock Advisor offers investors a clear roadmap to success, with insights on portfolio construction, regular analyst updates, and two new stock picks monthly. Since 2002, the Stock Advisor service has outperformed the S&P 500’s returns by more than threefold*.
*Stock Advisor returns as of April 15, 2024
Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.