TL;DR:
- GPUs are vital for AI, and AMD has competitive products.
- AMD’s business is diverse but more exposed to the consumer market than Nvidia.
- Nvidia leads in AI market leverage, but AMD stands to benefit incrementally.
- AMD’s stock is cheaper than Nvidia’s, but its valuation has risen significantly.
- AMD could be a promising AI investment, but investors should be cautious about expecting Nvidia-like growth.
- More insight into AMD’s AI impact will be revealed on August 1.
Main AI News:
When it comes to the world of artificial intelligence (AI), there’s no denying the indispensable role played by GPUs (graphics processing units). These hardware components, when combined in vast arrays, serve as the computational powerhouses that fuel the training of AI models. While the mention of GPUs usually brings Nvidia to mind, we mustn’t overlook AMD, which boasts an impressive GPU product and an array of other components essential for constructing cutting-edge data centers.
Nvidia may be at the forefront of the GPU market, but its stock is soaring to astronomical heights, making it a costly investment. On the other hand, AMD’s stock isn’t priced as steeply, yet it stands to gain a substantial boost from the AI revolution. Could AMD be the underdog that rises to become the most promising AI stock of the future? Let’s delve deeper to find out.
Unlike Nvidia, which concentrates heavily on AI, AMD boasts a much broader scope of business, encompassing a diverse product range that spans embedded processors, central processing units (CPUs), data processing units (DPUs), and other components that contribute to AMD’s formidable portfolio. While this diversification provides AMD with strength, it also exposes the company to fluctuations in the consumer market.
Nvidia consolidated its consumer segment under the umbrella of “Gaming,” which generated $2.2 billion, contributing 31% to the company’s total revenue in the first quarter of fiscal year 2024. However, this segment experienced a sharp decline of 38% year over year. On the other hand, AMD’s consumer-facing revenue comprises two key segments: clients (utilizing AMD CPUs in PCs) and gaming (providing GPUs for gaming laptops and consoles). Unfortunately, the client revenue witnessed a staggering 65% drop, falling to $739 million from $2.1 billion in 2022. Gaming, while performing better than Nvidia, still experienced a 6% decline in Q1. Together, these two segments accounted for 47% of AMD’s Q1 2023 revenue, compared to 68% in Q1 2022. This heightened exposure to the consumer market may pose challenges for AMD during periods of weakness in the PC market.
However, this concentration also indicates that AMD’s reliance on AI is not as pronounced as Nvidia’s. While both companies record AI-related revenue through their data center product lines, additional unrelated revenue is also captured under this segment. With Nvidia’s data center revenue surging by 14% year over year and constituting 60% of its total revenue, while AMD experienced a more modest 24% increase in this segment, it’s evident that Nvidia holds a higher level of leverage in the data center domain.
Nevertheless, this might not necessarily be a disadvantage for AMD. Nvidia’s stock price has soared to unprecedented heights, largely fueled by the AI hype. In contrast, AMD’s stock hasn’t experienced the same meteoric rise. However, if AMD can steadily capitalize on the AI trend and investors can acquire its stock at a more reasonable price, it might emerge as the smarter AI investment, avoiding the all-or-nothing volatility associated with Nvidia’s sky-high valuation.
Considering the valuation metrics, AMD’s stock offers a substantially cheaper alternative to Nvidia’s. But does this significant difference in margin profiles justify Nvidia commanding an almost six-times premium on its price-to-sales (P/S) ratio? The answer is debatable. While AMD may focus more on consumer-facing products, it is still poised to reap the rewards from the AI boom. Furthermore, if the AI trend proves to be more than just a passing fad, AMD’s stock faces considerably lower risk than Nvidia’s from a potential market downturn due to excessively inflated valuations.
Nonetheless, it’s essential to recognize that AMD’s valuation has climbed considerably since AI emerged as a prominent investment theme, currently resting at the higher end of its usual range. While AMD undoubtedly holds great promise as an AI investment, investors should temper their expectations regarding a meteoric rise akin to Nvidia’s.
In just a few days, on August 1, investors will gain more insight into AMD’s current state. As the impact of AI on the company’s business becomes clearer, investors can make more informed decisions about adding AMD shares to their portfolios. However, it’s crucial to keep in mind that until the consumer market regains its strength, AMD may continue to grapple with lackluster performance.
Conclusion:
AMD’s potential in the AI market is noteworthy, but it faces the challenge of balancing its broad business portfolio and consumer exposure against Nvidia’s more focused AI leverage. AMD’s stock presents a more affordable option for investors, but it should not be expected to surge to the same heights as Nvidia’s stock due to the latter’s AI hype. Investors should keep a close eye on AMD’s AI performance to make informed decisions, considering the market’s current state and the company’s strategy for navigating through consumer market challenges.
