Advanced Micro Devices (NASDAQ: AMD) grabbed Wall Street’s attention with its exceptional performance in the artificial intelligence (AI) sector, soaring 87% in the past year and maintaining a further 22% gain since the beginning of 2024.
The emergence of OpenAI’s ChatGPT sparked fresh enthusiasm for AI technologies, prompting many tech firms to refocus their strategies on this rapidly expanding market. The surge in AI demand also amplified the sales of graphics processing units (GPUs), critical for AI model training.
While AMD lagged behind Nvidia in AI chip development initially, it is now making substantial investments in the domain and stands to reap substantial rewards in the years ahead.
AMD’s Sky-High Potential in AI Sector
Data from Grand View Research reveals that the AI industry reached nearly $200 billion last year, with projections indicating a staggering 37% compound annual growth rate until 2030, culminating in close to $2 trillion by the decade’s end.
Despite Nvidia’s dominant market share in AI GPUs during the previous year, standing at around 90%, AMD is gearing up to challenge this supremacy in the current year.
Late last year, AMD unveiled its latest MI300X AI GPU, designed to directly compete with Nvidia’s offerings. The chip has already attracted major industry players such as Microsoft and Meta Platforms as clients.
Striving for Dominance in AI Arena
Though AMD’s earnings have yet to fully reflect its substantial AI investments, recent quarterly results suggest a positive trajectory. In the fourth quarter of 2023, AMD’s revenue surged by 10% year over year to $6 billion, surpassing analysts’ expectations by approximately $60 million. Notably, its AI-focused data center segment reported a 38% revenue increase.
In addition to AI chips, AMD is expanding its market presence by venturing into AI-powered personal computers. A report by IDC forecasts a significant upsurge in PC shipments this year, with AI integration playing a pivotal role in driving this growth.
According to Canalys, an estimated 60% of all PCs shipped in 2027 will be AI-enabled.
If AMD secures a strong foothold in the AI PC market, it stands to witness substantial revenue growth as demand escalates.
Revitalized PC Market Growth
In tandem with AI advancements, AMD is reaping the benefits of a resurgent PC market. Inflation spikes led to a sharp decline in PC sales, with shipments plummeting by 16% in 2022 and continuing to decrease throughout most of 2023. Recent data indicates a turnaround in the market’s fortunes.
Reports from Gartner reflect a 0.3% increase in PC shipments during the fourth quarter of 2023, marking the first upturn in over a year. This market recovery is mirrored in AMD’s sales performance, with its PC-focused client segment reporting a remarkable 62% revenue surge in Q4 2023.
Benefiting from AI advancements and the PC market rebound, AMD is on a promising growth trajectory.
Potential for AMD to Outstrip Nvidia
While Nvidia raced ahead in 2023 to become the first chipmaker with a market cap exceeding $1 trillion, the immense potential of AI suggests there is still ample room for growth for both companies. However, new investors might find greater long-term gains with AMD.
Earnings per share projections reinforce this narrative.
Data by YCharts
The chart suggests that AMD’s earnings could reach $7 per share over the next two fiscal years, while Nvidia’s may approach nearly $36 per share. On the surface, Nvidia appears the frontrunner. However, considering these figures in relation to their respective forward price-to-earnings ratios (AMD’s 49 and Nvidia’s 38) paints a different picture: AMD’s stock could be valued at $345, while Nvidia’s might hit $1,353.
From these projections, it appears AMD’s stock could potentially surge by 92% by fiscal 2026, while Nvidia’s growth is projected at 43%. Nvidia’s growth prospects are promising, yet AMD’s potential growth is a tantalizing prospect worth exploring. Although AMD may be at an earlier stage in its AI journey, this could imply it has more room for expansion.
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