With the launch of Open AI’s chatbot, ChatGPT, artificial intelligence (AI) technology has taken the investment world by storm. And few companies have benefited more than the tech giant Nvidia, which is up by a whopping 218% year to date. But Advanced Micro Devices (AMD 2.92%) also stands to benefit from this opportunity. Let’s discuss why it could make an excellent alternative for value-focused investors.
The AI market is big enough for competition
AI might be a transformational tech megatrend — just like the internet and smartphones. And it is growing quickly. According to data provided by Statista, the global AI market could reach a whopping $2 trillion by 2030 as businesses implement the technology in use cases ranging from supply chain optimization to product development. But just like with the internet (and the dot-com bubble that followed it), not every company that seeks to capitalize on the AI opportunity will stand the test of time.
To minimize risk, it makes sense for investors to bet on companies that take a picks-and-shovels approach to the gold rush. In other words, the ones supplying the infrastructure and support that other companies need to build out their more consumer-facing applications.
Right now, chipmaker Nvidia controls over 80% of the market for AI-capable chips. However, this dynamic is ripe for disruption because it causes challenges with supply and pricing. According to Venture Beat, the Nvidia graphics processing unit (GPU) shortage is “top gossip” in Silicon Valley because it increases development costs and forces companies to delay product launches. For Advanced Micro Devices, this challenge is an epic opportunity.
AMD is investing in its AI-capable hardware
According to CEO Lisa Su, AMD sees AI as its largest and most strategic long-term growth opportunity. And in June, the company revealed its most advanced AI chip, the M1300x “accelerator,” which can use up to 192 GB of memory — comparing favorably to Nvidia’s leading AI chip, the H100, which supports only 120 GB. AMD will begin limited sales this year, with deliveries ramping up in 2024.
A lot remains unknown about the M1300x (such as its price and specific details about performance). But in the consumer GPU market, AMD’s strategy has often involved undercutting Nvidia on price.
Instead of offering the most powerful hardware, AMD focuses on delivering value for money. The company could implement a similar strategy to gain market share in AI chips. Either way, management is confident — projecting that the market for its accelerators could jump from $30 billion to $150 billion by 2027, a compound annual growth rate (CAGR) of 50%.
AMD’s valuation is much lower than Nvidia’s
Perhaps the most compelling reason to buy AMD over Nvidia is valuation. While both companies have performed well in 2023 (up 66% and 218%, respectively), Nvidia’s rally has taken it into nosebleed territory.
With a price-to-sales (P/S) multiple of 36, Nvidia’s stock trades for over 14 times the S&P 500 average of 2.5 and over four times more than AMD’s P/S of just 8. And while Nvidia may stand to gain the most from AI, AMD gives investors a more value-oriented way to bet on the opportunity.
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