AMD vs. Nvidia: A Second Fiddle That Could Still Play a Winning Tune for Investors

jun | May 24, 2024

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Advanced Micro Devices (AMD) has consistently played second to Nvidia in the semiconductor industry, particularly in the rapidly expanding field of artificial intelligence. Despite a recent dip in its stock price, triggered by concerns about slower-than-expected progress in AI and weakness in other areas like gaming and auto chips, AMD’s long-term prospects remain bright.

Some industry experts view AMD’s position as the “Pepsi” to Nvidia’s “Coke,” highlighting the importance of having a reliable alternative to ensure a stable supply of chips at competitive prices. This dynamic has fueled AMD’s impressive stock growth over the past two decades, and it continues to be a driving force behind its potential for future gains.

While the industrial and gaming sectors, which collectively account for a significant portion of AMD’s business, have faced challenges such as oversupply and a decline in consumer spending, signs of stabilization are emerging. Recent positive results from Analog Devices in the industrial segment offer encouragement, and a gradual recovery in the gaming market is anticipated, driven by factors like improving consumer sentiment and the release of highly anticipated new games.

The real game-changer for AMD lies in its data-center business, particularly with the introduction of its new AI chip, MI300. Although initial sales have been slower than expected, the MI300 is rapidly gaining momentum and has already achieved a significant milestone, surpassing $1 billion in sales in less than two quarters.

This strong demand stems from major tech players like Meta Platforms, Microsoft, and Alphabet, who are investing heavily in expanding their data-center capacity to support AI initiatives. The need for immediate access to chips and a desire to diversify suppliers to manage costs present a significant opportunity for AMD to gain market share.

As a result, financial analysts anticipate substantial growth in AMD’s earnings per share in the coming years, fueled by the expanding data-center market and the growing adoption of AI technologies. While the stock’s current valuation might seem high compared to traditional metrics, it appears reasonable when considering the company’s expected earnings growth and comparing it to the broader market.

The key takeaway is that AMD’s position as the second fiddle to Nvidia doesn’t diminish its potential to deliver strong returns for investors. Just as it successfully competed with Intel in the past, AMD’s ability to capitalize on emerging trends like AI and cater to the diversifying needs of major tech companies could propel its stock to new heights in the years to come.