The metaverse is going to unlock a massive opportunity for chipmakers such as Nvidia (NVDA 3.55%) and Advanced Micro Devices (AMD 2.78%), as powering this tech trend will require loads of computing power that will be provided by the CPUs (central processing units) and GPUs (graphics processing units) that these companies sell.
The good part is that both Nvidia and AMD have started benefiting from the metaverse, a concept that will enable people to interact in 3D virtual worlds from locations across the globe. The companies' chips have already found their way inside Meta Platforms' (META 2.86%) supercomputer, enabled by artificial intelligence (AI), which is expected to be one of the building blocks of the metaverse.
However, if you had to choose one of these tech stocks to take advantage of the metaverse, which one should you buy? Let's find out.
Image source: Getty Images.
The case for Nvidia
Investment bank Cowen estimates that by 2030, Nvidia could generate annual revenue of $140 billion and earnings of $28 per share on the back of multiple catalysts, including the metaverse. The graphics card specialist is already enjoying impressive growth in the video gaming and data center markets, and the metaverse is expected to give its terrific pace of growth a nice shot in the arm.
Those numbers suggest a huge improvement over Nvidia's fiscal 2022 revenue of $27 billion and earnings of $4.44 per share. It won't be surprising to see Nvidia meet those ambitious revenue and earnings predictions by 2030, as the metaverse could supercharge its three key business segments.
First, Nvidia's video gaming revenue could continue to increase at an eye-popping pace in the future thanks to the metaverse. That's because the revenue from virtual video gaming worlds in the metaverse is expected to hit $400 billion in 2025 from $180 billion in 2020, according to cryptocurrency asset management firm Grayscale.
Supporting these virtual gaming worlds, which will be served to a huge number of gamers in real-time, would require greater investment in gaming hardware. More specifically, the market for gaming hardware to support 3D virtual worlds is expected to increase from $63.5 billion in 2020 to $77.8 billion in 2024, according to third-party estimates. This should unlock a solid opportunity for Nvidia to grow its gaming business, as the company controls 81% of the market for gaming graphics cards.
Second, Nvidia's data center business is already gaining from the metaverse. Meta Platforms is going to deploy 16,000 of Nvidia's GPUs in its AI Research SuperCluster (RSC) supercomputer by the end of the year. Meta points out that this supercomputer will help it in building out the metaverse. Looking ahead, it won't be surprising to see more supercomputers being deployed to aid the rollout.
According to a third-party estimate, the global supercomputer market is expected to clock an annual growth rate of 9.5% through 2026. Those supercomputers are likely to be loaded with more GPUs to accelerate metaverse-related workloads. With Nvidia controlling over 90% share of the market for supercomputing accelerators, the chipmaker's data center business can keep getting better.
The third Nvidia business that could gain big-time from the proliferation of the metaverse is professional visualization. The segment's revenue had shot up 109% year over year in the fourth quarter of fiscal 2022 to $643 million, while full-year revenue doubled to $2.1 billion.
The growing adoption of Nvidia's Omniverse platform can keep driving impressive growth in this segment, as the company is enabling creators and enterprises to make digital twins and 3D designs that could be deployed in the metaverse. It's worth noting that the digital-twin market is expected to clock an annual growth rate of 58% through 2026; that could pave the way for further growth in the professional visualization business.
The case for AMD
Just like Nvidia, AMD sells graphics cards that are deployed in data centers and video gaming applications, so it's targeting the same markets as Nvidia. However, as seen above, Nvidia is the dominant player in these markets. As of last month, AMD controlled just 19% of the market for gaming graphics cards, and it's a much smaller player in the supercomputer GPU market.
However, the accelerated growth of the video gaming and data center markets thanks to the metaverse will also give AMD's business a boost, since it will have a larger addressable opportunity to tap into. It's also worth noting that AMD has been making progress in the data center GPU market as more supercomputers have been adopting its graphics cards.
AMD CEO Lisa Su said on the company's February earnings conference call:
We are seeing growing customer engagements for our data center GPUs based on the leadership AI and HPC [high-performance computing] performance of our new MI200 accelerators, highlighted by multiple supercomputing wins and an expanded set of platforms on track to launch from Atos, Dell [Technologies], HP, Lenovo, Super Micro [Computer], and others starting later this quarter.
On the other hand, AMD is taking share away from Intel in the supercomputer CPU market. According to a report released in November 2021, AMD was powering 73 of the top 500 supercomputers, up significantly from the prior-year period's 21. What's more, AMD's server CPUs are powering Meta's AI RSC supercomputer discussed above. That supercomputer contains 4,000 of AMD's EPYC server processors, which means that AMD is involved in building the metaverse just like Nvidia.
AMD has an advantage over Nvidia in the metaverse, as the latter doesn't have a CPU on sale yet; its Grace CPU is expected to arrive only next year. Another advantage for AMD is that it supplies chips to Microsoft and Sony for their latest consoles. Both these console makers are pursuing the metaverse opportunity in the video game market in different ways.
Microsoft, for instance, has announced that it will be acquiring Activision Blizzard for $68.7 billion in a bid to boost its metaverse presence with a bigger library of games. Sony, on the other hand, is reportedly working on the next generation of its virtual reality headset, which is expected to hit the market by the end of the year. These moves can help Microsoft and Sony sell more of their consoles and eventually give AMD's business a nice boost.
So, just like Nvidia, AMD can benefit from the metaverse in multiple ways. Both companies are targeting similar end markets within the metaverse. And there's no clear winner between the two, as Nvidia is dominating a couple of key markets while AMD enjoys an edge in other areas. However, their valuations and projected growth rates could make it easier for investors to decide on just one of these potential metaverse winners.
The verdict
The metaverse is in its infancy right now, and any projections about its impact on the growth of Nvidia and AMD should be taken with a pinch of salt. However, one thing that's certain is that both these chipmakers are going to play an important role in the adoption of the metaverse.
AMD presents the cheaper way for investors to take advantage of this next big tech trend; it's trading at 44 times trailing earnings and 28 times forward earnings and has a price-to-sales ratio of 8.6. Nvidia is more expensive with a trailing earnings multiple of nearly 69 and forward earnings multiple of 47; its price-to-sales ratio stands at 25.
Analysts expect both companies to clock 30% annual earnings growth for the next five years.
So, based on its relatively cheaper valuation, AMD looks like a prudent metaverse bet. However, Nvidia's rich valuation seems justified, given the terrific pace of growth driven by its existing catalysts. The addition of metaverse-related opportunities could supercharge Nvidia in the long run, which is why investors with an appetite for risk might consider taking advantage of the stock's recent pullback.
Both AMD and Nvidia could turn out to be top metaverse stocks in the long run, though which one is better would depend on the valuation investors are willing to pay.
