Artificial intelligence (AI) has been the darling of Wall Street for over a year now, with phenomenal growth potential and attractive investment opportunities. The data from Grand View Research reveals that the AI market hit close to $200 billion last year, and it’s on track to expand at a remarkable compound annual growth rate of 37% until at least 2030. By the end of the decade, the segment could be valued at nearly $2 trillion.
Despite the industry’s impressive ascent, it seems like it’s just the tip of the iceberg in terms of its growth potential. Therefore, there is still ample opportunity to tap into the AI market and reap its benefits for years to come.
For investors eyeing the AI sector, two intriguing options are Advanced Micro Devices (NASDAQ: AMD) and Alphabet (NASDAQ: GOOG, NASDAQ: GOOGL), each playing a distinct role in the AI ecosystem. Let’s delve deeper into these companies to determine the better investment choice in the burgeoning AI market.
A Winning Bet on Advanced Micro Devices
Advanced Micro Devices (AMD) has witnessed a 43% surge in its shares year-to-date, driven by its strategic pivot towards AI to capture a share of this lucrative market. In 2023, Nvidia dominated headlines by securing an estimated 90% market share in AI graphics processing units (GPUs), leaving AMD trailing behind. However, AMD shifted its focus in the last year, gearing up for a potential breakthrough in the industry in 2024.
Last December, AMD unveiled its new MI300X AI GPU, directly competing with Nvidia’s offerings and attracting major tech players like Microsoft and Meta Platforms as clients. Despite heavy investments in AI, AMD’s financial performance is promising. In the fourth quarter of 2023, the company’s revenue surged by 10% year-over-year to $6 billion, surpassing analysts’ expectations by approximately $60 million.
With a AI-focused data center segment driving a revenue growth of 38% and a remarkable 65% year-over-year improvement in its client segment, AMD is not just about AI chips – it is broadening its presence in the market by expanding into AI PCs, aiming to assert dominance in its segment.
Alphabet’s Alphabet in the AI Soup
Claiming the tech throne, Alphabet, with its brands like Android, YouTube, and Google, commands a massive user base globally. Alphabet has secured a leading 25% market share in the digital advertising space, underscoring its dominant position in the tech arena. However, all eyes have been on Alphabet’s AI ventures over the past year.
By the end of 2023, Alphabet showcased Gemini, a significant language model that could position the company competitively against cloud rivals Microsoft and Amazon. However, the tech giant’s stock plummeted by 7% in the last month following a lackluster launch for Gemini. Alphabet had to take its AI image services offline temporarily due to inaccuracies and misinterpretations made by the model.
Despite recent setbacks, Alphabet generated nearly $70 billion in free cash flow last year. While Alphabet faces challenges in getting its AI technology back on track and keeping pace with competitors, the company remains financially robust with sufficient resources for continued business investments.
Picking the Winner: AMD vs. Alphabet
Although AMD and Alphabet both have promising long-term prospects in the AI industry, recent software hiccups at Alphabet make AMD’s chip business seem like a more secure bet for now. Moreover, earnings per share (EPS) estimates indicate that AMD might have more growth potential in the next two years.
The EPS estimates project AMD’s earnings to surpass $7 per share in the upcoming fiscal years, slightly behind Alphabet’s estimated $9 per share. Despite this, when considering forward price-to-earnings ratios – 58 for AMD and 20 for Alphabet – the projected stock prices indicate a potentially more substantial rise for AMD compared to Alphabet by 2026.
With a more reliable position in the AI realm, AMD’s stock emerges as a compelling buy over Alphabet at this juncture.
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