AMD May Not Beat Nvidia, But Here’s Why It’s Still a Long-Term Buy

With a market share of 90%, Nvidia (NASDAQ: NVDA) reigns supreme in the artificial intelligence (AI) chip market. Yet, ironically, the company’s very success has created favorable conditions for its rivals to knock the AI ​​titan down a notch or two. Advanced microsystems (NASDAQ: AMD) realizes the opportunity that limited supply represents for Nvidia and intends to fully exploit these fortuitous circumstances to its advantage.

Why Nvidia’s Ripple Effect Is Creating Unprecedented Opportunities for AMD

Nvidia’s unprecedented revenue growth, rising stock price, and massive market capitalization have demonstrated that the AI ​​infrastructure market is sustainable and limitless. The hyper-demand for Nvidia’s chips has dispelled any lingering doubts that the AI ​​craze is just another dot-com bubble waiting to burst.

Graphics processing units (GPUs) are the lifeblood of generative AI systems. Semiconductor manufacturers like AMD provide the critical chip architecture capabilities needed to create and maintain such systems. The technology companies that build or design these critical components are the only companies currently capable of turning the hype around AI into a revenue-generating reality.

Computer hardware companies such as Dell And LenovoCloud providers and companies in the cloud need AI chips now and at competitive prices to meet growing customer demand. They can’t get chips from Nvidia fast enough, which means they have to buy GPU hardware from other sources.

Recognizing the profit potential presented by the current supply-demand imbalance, AMD quickly seized the opportunity by rapidly ramping up production of its 1300 Series AI GPU processors as an alternative to Nvidia’s offerings for a tech industry hungry for data center chips.

AMD looks set to expand its presence in AI

Like other semiconductor makers, AMD has been plagued by a chip glut over the past two years that is only now starting to dissipate as tech companies reduce excess inventory. Poor performance in the company’s two non-data center segments led to overall revenue growth of a modest 2% from a year earlier. The company’s gaming segment fell 48% from a year earlier; its embedded segment, which serves the processing needs of the industrial, automotive and test sectors, fell 46% from a year earlier.

The most telling indicator of the company’s prospects, however, is the astounding growth in its data center business. Revenue in that segment rose 80% from a year earlier to $2.3 billion. The client segment, which provides processors for servers, laptops, mobile devices and desktops, jumped 85% to $1.4 billion.

Accelerated growth in the data center and customer segments prompted the company to raise its full-year 2024 guidance to $3.5 billion to $4 billion. CEO Lisa Su said those estimates are realistic given customer commitments.

Over time, profits from AMD’s cloud GPU sales will far outpace those from the two non-data center segments that dragged down overall revenue.

An attractive investment opportunity for long-term appreciation

Given its stagnant annual growth of 46 times trailing earnings, AMD’s current valuation seems overblown. At 47 times the same multiple, Nvidia barely beats AMD by that same measure, even though its recent growth rate has been much higher.

Given that AMD is categorized as a semiconductor company, its current valuation doesn’t fully reflect its long-term revenue potential. For a company that just got into the AI ​​GPU space, AMD’s data center growth has been off the charts. The market will continue to respond favorably to AMD’s offerings as cloud providers welcome competition. Many don’t want to be locked into Nvidia’s ecosystem.

By some estimates, the AI ​​market could reach $403 billion by 2027 and $1 trillion by 2030. These projections demonstrate the extent to which AMD can benefit from AI’s long-term revenue potential.

Cloud providers want competitive pricing for their chips, paving the way for AMD and others to grab Nvidia’s market share. With its AI data center-focused strategy, AMD’s valuation as an AI stock will rise over time as the company’s growing earnings reveal that its long-term growth potential in AI is sustainable.

Investors should not expect short-term gains from the stock. Buying AMD is only suitable for those with a long-term investment horizon.

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The Motley Fool has positions in and recommends Advanced Micro Devices, Microsoft, and Nvidia. The Motley Fool recommends the following options: long Microsoft $395 maturing in January 2026 and short Microsoft $405 maturing in January 2026. The Motley Fool has a disclosure policy. John Kinsellagh has no position in the stocks mentioned in the article.

AMD May Not Beat Nvidia, But Here’s Why It’s Still a Long-Term Buy was originally published by The Motley Fool