Demand for chips is likely to soar in the coming years as markets such as artificial intelligence (AI), cloud computing, and virtual/augmented reality expand. That makes semiconductor companies like Advanced Micro Devices (AMD 1.33%) attractive investments.
AMD initially made a name for itself by producing effective components for the PC market, which allowed it to win considerable market share from Intel. However, its expansion into other areas such as chips for data centers and semi-custom chips has strengthened its business and helped it ink partnerships with some of the biggest names in the industry.
While there's plenty to appreciate about AMD, some investors have started to fear it's falling behind in a crucial market as its biggest competitor, Nvidia, takes the lead in AI.
Here's one green flag and one red flag for AMD in 2023.
Green flag: It's partnering with the biggest names in tech
The tech market is vast, and comprises everything from smartphones to video game consoles and digital services like streaming and cloud platforms. The best part for AMD and its investors is that almost every facet of the industry requires chips to run and expand. The tech giant has used its position as a leading chipmaker to diversify its business and collaborate with some of the world's most valuable companies.
For instance, in 2020, AMD became the exclusive supplier of graphics and processing power in Sony's PlayStation 5 and Microsoft's Xbox Series X|S gaming consoles through its custom system-on-a-chip offerings. Those partnerships propped up AMD's gaming segment in 2022, where revenue rose 21% despite the macroeconomic headwinds. Sony and Microsoft are both expected to debut beefier versions of their current consoles within the next two years, which could further boost AMD's earnings.
Moreover, the company's thriving data center business has steadily expanded its position in cloud computing. According to data from Statista, the cloud market is projected to hit $526 billion this year and $882 billion by 2027. Chips like AMD's graphics processing units (GPUs) and central processing units (CPUs) will be critical to that growth, especially as the industry is increasingly using AI to enhance cloud services.
The company already has Microsoft's Azure, Alphabet's Google Cloud, and Oracle signed on as clients, putting it in a solid position to profit from the market's growth.
Red flag: Nvidia beat AMD to the plate in AI
The launch of OpenAI's ChatGPT in November kicked off a new phase of the AI race that has seen a raft of tech companies rushing to compete. As a result, Nvidia's role as the primary supplier of GPUs to ChatGPT has lifted it to the front of the burgeoning industry, boosting its shares 168% since Jan. 1. Comparatively, AMD's shares have risen 87% year to date.
Investors are concerned that Nvidia's lead could grow as the industry develops, making it difficult for competing semiconductor companies like AMD to catch up. However, according to a Grand View Research study, the AI market is projected to expand at a compound annual rate of 37% through at least 2030, suggesting there will be plenty of opportunities for AMD as well.
Additionally, it was recently revealed that Microsoft is supporting AMD's AI chip development, providing it with financial and engineering resources. The goal of their alliance is to create an alternative to Nvidia's GPUs.
As the largest investor in OpenAI, Microsoft has become one of the biggest names in AI. Its alliance with the younger company has allowed Microsoft to heavily integrate AI technology across its different programs, which makes it an even more valuable resource for AMD in this arena.
AMD may not be the current leader in AI chips, but that market is still young. The chipmaker has vast potential in the field over the long term. Meanwhile, its relatively smaller stock rise this year has left its shares trading at a better valuation than its rival: Nvidia's forward price-to-earnings ratio is now at 68, while AMD's is just 38.
