After outperforming the market in 2023, the stock prices of Advanced Micro Devices (NASDAQ: AMD) and Nvidia (NASDAQ: NVDA) are maintaining their momentum in 2024. AMD shares have surged by 23%, while Nvidia stock is up by an impressive 26% year-to-date, leaving the S&P 500 index behind.
Investors are urged to exercise caution in paying too much for a stock, but there are compelling reasons to anticipate further growth in these leading artificial intelligence (AI) stocks over the coming years.
AMD’s Push Into AI Market
AMD is a prominent supplier of central processing units (CPUs) for PCs and servers and has been gaining market share against Intel. The company’s foray into high-performance computing chips has yielded significant returns, and the new year presents fresh opportunities for this technological innovator.
AMD is aiming to capitalize on its recent CPU success by entering the data center graphics processing unit (GPU) market to capture the burgeoning AI market. Despite a global slowdown in the semiconductor industry pressuring its revenue growth over the last year, the positive outlook issued by leading chip foundry Taiwan Semiconductor Manufacturing in its latest earnings report bodes well for AMD as one of its key customers.
With a projected revenue of $2 billion from data center GPUs this year and the upcoming launch of the new MI300 chip for AI workloads, AMD is well-positioned to cater to a growing demand. Notably, major tech players such as Meta Platforms, OpenAI, and Microsoft are already lined up to utilize the new chips.
Furthermore, AMD is experiencing a strong rebound in its CPU business, with its EPYC server chips registering revenue growth of more than 50% quarter over quarter in Q3 of 2023 and its Ryzen 7000 series CPUs for consumer PCs posting robust growth of 46% sequentially.
Despite trading at a higher forward price-to-earnings (P/E) ratio of 47 compared to Nvidia, the combination of a recovering CPU market and growth prospects in AI GPUs makes AMD an enticing long-term investment.
Nvidia’s Dominance in AI Chip Market
Nvidia’s estimated 90% share of the AI chip market and its lower forward P/E ratio of just 31 based on this year’s earnings estimate make it an attractive investment option. The company has a long history of being ahead of the curve, with a significant presence in the GPU market. This longstanding reputation and early recognition of the potential in data centers have enabled Nvidia to amass over $37 billion in research and development investments, securing its leading position in the GPU market.
In addition to a lower valuation, another reason to favor Nvidia is its profitability. Apart from chip hardware, Nvidia also provides networking equipment, software libraries, and development tool kits, which confer a noteworthy competitive advantage and account for the company’s impressive software-like profit margin of 42%, surpassing AMD’s historical margins.
Furthermore, with the world’s data centers gradually upgrading their equipment for AI processing, a recent Instagram post by Meta CEO Mark Zuckerberg revealed plans to deploy 350,000 of Nvidia’s H100 GPUs to bolster the company’s compute infrastructure to support its future roadmap.
The soaring demand for these chips propelled Nvidia’s data center revenue to $14.5 billion in the quarter ending in October, marking a substantial increase from $3.8 billion in the year-ago quarter. Given Nvidia’s superior profitability and growth prospects, the stock is likely to scale new heights over the next few years, if not by the year’s end.
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