In the realm of artificial intelligence (AI) stocks, one often hears the resounding name of Nvidia echoing through the walls of investor forums. The path carved by CEO Jensen Huang, leading Nvidia to the forefront of AI chip development, has indeed positioned the company as a dominant force in a burgeoning and highly profitable sector. However, beneath the allure of Nvidia, lie valuation concerns that have left some investors seeking alternatives in the AI stock universe.
Exploring a Promising AI Contender
Stepping into the spotlight as a formidable competitor to Nvidia is Advanced Micro Devices (NASDAQ: AMD). Innovating to challenge Nvidia’s supremacy in AI chips, AMD has unleashed its MI300 series of chips, offering a cost-effective alternative for customers who seek to navigate around Nvidia’s premium-priced offerings.
A recent triumph for AMD was securing Oracle as a client for its MI300X chips to drive the latest OCI Compute Supercluster instance. This victory underscores AMD’s escalating competitiveness within the AI chip sector.
AMD’s roadmap includes the upcoming launch of the MI325X chips towards the end of this year. These chips are designed to support up to 288GB of memory and offer impressive bandwidths reaching 6 terabytes per second.
Looking ahead, AMD is gearing up to unveil its enhanced CDNA architecture in 2025, promising to boost computational throughput. Leveraging its history of playing catch-up and occasionally surpassing its rivals, these advancements could be game-changers for AMD and the wider AI chip industry.
Positive Developments on the Horizon
Acknowledging AMD’s current financial metrics might not dazzle investors, with revenue totaling $11 billion for the first half of the year, marking a modest 6% yearly increase. Despite this, the $388 million net income for the same period indicates progress from the $112 million loss a year earlier.
Notably, the data center segment responsible for managing AMD’s AI chips witnessed a substantial revenue surge, reaching $5.2 billion in the first half of the year, reflecting a robust 98% annual growth.
Moreover, the data center segment’s revenue contribution surged from 24% in the first two quarters of 2023 to 46% in the first half of the current year. This trend mirrors Nvidia’s trajectory, which now derives a whopping 88% of its revenue from the data center segment compared to three years ago. It underscores the transformative power of AI accelerators within a semiconductor company.
While revenue dips in AMD’s gaming and embedded segments have weighed on its growth figures, a reversal in these segments could bolster the company’s financial outlook.
Despite lagging behind its rival in terms of stock performance—rising by a modest 15% versus Nvidia’s impressive 155% hike—AMD’s recent return to profitability has muddled its valuation metrics, rendering the P/E ratio a questionable yardstick for assessing its true worth.
Currently, AMD’s stock trades at 12 times its sales, contrasting with Nvidia’s lofty price-to-sales (P/S) ratio of 33. Should AMD narrow the competitive divide, its stock stands poised for a potential upsurge as AI chips ascend in prominence as a key revenue stream.
Potential in Investing with AMD
With the stars aligning, the moment seems opportune for investors to consider AMD.
Nvidia’s initial strides in the AI chip domain may have caught many off guard, yet AMD has diligently toiled to keep pace and innovate in this domain—a momentum corroborated by its revenue growth. Much like Nvidia, AMD’s data center wing is progressively asserting authority, backed by a surging demand for its AI chip offerings.
Notwithstanding a sluggish stock performance this year, attributed in part to downturns in the gaming and embedded segments, the market has bestowed Nvidia’s stock with sky-high expectations, implying limited upside in the near term. On the flip side, AMD boasts significant potential for growth should it sustain momentum in AI chip sales and revitalize its struggling segments. Such a scenario could lay the groundwork for AMD to outshine Nvidia, even without closing the technical gap entirely.
Embrace the Second Chance for Lucrative Returns
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Discover 3 “Double Down” stocks »
*Stock Advisor returns as of October 7, 2024