As the year 2023 dawned, the artificial intelligence (AI) market began a meteoric rise, attracting a vast array of businesses eager to delve into its potential. Initially deemed a passing fad, the enduring success and profitability experienced by numerous companies investing in AI have firmly established this technology boom as a mainstay.
In the previous year, the AI market amassed nearly $200 billion in revenues, with projections soaring close to $2 trillion by 2030. With escalating industry expenditure, the investment window remains wide open.
Microsoft (NASDAQ: MSFT) and Advanced Micro Devices (NASDAQ: AMD) emerge as compelling choices, each carving its niche in the dynamic realm of AI software services and cutting-edge chip development.
Let’s dissect these tech behemoths to ascertain the superior investment avenue in the realm of AI.
The Microsoft Marvel
On April 25, as Microsoft unveiled its third-quarter earnings for 2024, its stock surged by 5% in after-hours trading. The quarter witnessed revenue climb 17% year over year, reaching $62 billion, outstripping Wall Street estimates by a cool billion.
The standout performer in this period was Microsoft’s Intelligent Cloud division, which encompasses its earnings from the AI-centric cloud platform Azure. The segment exhibited a robust 21% revenue surge year over year, underlining the potential lucrativeness of Microsoft’s foray into AI.
Microsoft’s early investment in AI, signifying a $1 billion stake in ChatGPT creator OpenAI back in 2019, has flourished into a $13 billion asset. This alliance provides Microsoft access to cutting-edge AI models, seamlessly embedded across its product spectrum – from novel offerings in the Office suite to its Azure cloud platform and Bing search engine. Backed by substantial financial reserves, a sprawling user base, and OpenAI’s advanced technology, Microsoft is poised to emerge as a formidable force in the AI domain.
The AMD Ascent
AMD shares have skyrocketed by 83% over the past year, driven more by the company’s long-term AI potential than immediate results. While AMD trailed its competitor Nvidia in the AI race, the upcoming release of its first-quarter 2024 earnings on April 30 could signal a breakthrough. Over this period, AMD has realigned its focus towards AI, rolling out its MI300X, an AI-centric graphics processing unit (GPU) designed to compete head-on with Nvidia’s offerings. Noteworthy names like Microsoft, Oracle, and Dell have already integrated AMD’s new chips into their frameworks.
All eyes are trained on AMD’s data center segment’s performance in Q1 2024. Industry experts at Zacks foresee a substantial 76% annual escalation in AMD’s data center revenue, likely revitalizing the company’s stock performance. The chip manufacturer’s ambitious venture into AI-powered personal computers forecasts a bright future, with IDC projections indicating that AI PCs could dominate nearly 60% of all PC shipments by 2027.
Deciding the AI Champion
As Microsoft and AMD drive AI innovation forward, they are poised to play pivotal roles in shaping the industry’s trajectory over the next decade. Both entities stand to gain from each other’s triumphs, with Microsoft incorporating AMD’s chips within its network infrastructure.
Albeit AMD’s promising AI trajectory, Microsoft emerges as the more dependable investment avenue due to the sheer potency of its services and the substantial market share it commands in cloud computing. Boasting colossal user bases through platforms like Office and Azure, Microsoft is well-positioned to spearhead commercial and public adoption of AI.
The data reflects a substantial value proposition favoring Microsoft over AMD. Microsoft’s forward price-to-earnings (P/E) and price-to-free cash flow metrics significantly outshine AMD’s counterparts, suggesting that Microsoft offers a more lucrative investment prospect.
Microsoft’s stock, trading at a P/E ratio of 34 compared to AMD’s 43, is more attractively valued. This holds true for their price-to-free cash flow ratios as well, with Microsoft’s free cash flow surging to $70 billion last year, in stark contrast to AMD’s slightly over $1 billion, underscoring Microsoft’s robust financial backing to drive AI development and compete vigorously.
Given Microsoft’s stellar financial performance, expanding cloud ecosystem, and formidable resources, it emerges as a compelling AI investment choice over AMD.