Could AMD Become the Next Nvidia?

There are a lot of similarities between Advanced Micro Devices (AMD -8.91%) and Nvidia (NVDA -3.89%), two semiconductor companies that have set the stock market on fire in 2023 with gains of 85% and 192%, respectively.

Both companies make chips that are used in personal computers (PCs), gaming consoles, and data centers. However, Nvidia has pulled significantly ahead of AMD of late even though both companies are facing the same headwinds. For example, AMD now has a market cap of $193 billion, while Nvidia is now a $1 trillion company.

The weakness in the PC market has led to a sharp decline in the revenue and earnings of AMD and Nvidia in recent quarters, but the latter has put that headwind in the rearview mirror thanks to the strength of the data center business.

Specifically, Nvidia is reaping the rewards of its dominance in the enterprise graphics processing unit (GPU) market, a niche that's witnessing an explosion in demand thanks to the adoption of artificial intelligence (AI) applications. Nvidia's data center strength is expected to help the company deliver 59% revenue growth this fiscal year to nearly $43 billion. Meanwhile, the semiconductor giant's earnings are expected to more than double to $7.32 per share in the current fiscal year.

AMD's revenue, on the other hand, is expected to drop 2.6% to $23 billion, while earnings could contract 18% to $2.86 per share. However, the smaller chipmaker is now trying to turn things around by jumping into a market that has helped Nvidia pull ahead. But will this move help AMD become the next Nvidia? Let's find out.

AMD wants a piece of the AI market

AMD has missed out on the sudden burst in demand for graphics cards that power AI applications. Nvidia reportedly controls 80% to 95% of this market as per analysts' estimates, and this is the reason why the company's data center revenue increased 14% year over year in the first quarter of fiscal 2024 to $4.28 billion.

AMD's data center revenue, on the other hand, was flat year over year in the first quarter of 2023 at $1.3 billion. Nvidia expects to deliver even stronger data center growth in the fiscal second quarter, which is evident from the company's revenue guidance of $11 billion -- an increase of 64% over the prior-year period. That's not surprising, as the company's data center GPUs are in hot demand and reportedly command a waiting period.

AMD, meanwhile, recently introduced its MI300X GPU that's meant for accelerating generative AI applications. The company claims that this chip can provide "the compute and memory efficiency needed for large language model training and inference for generative AI workloads." What's more, AMD has clubbed together eight MI300X accelerators as a part of its Instinct Platform and claims that it can provide "the ultimate solution for AI inference and training."

There is no doubt that AMD is moving in the right direction with these moves, especially considering that the market for AI chips could generate $227 billion in annual revenue by 2032 as compared to $17 billion last year, according to Precedence Research. However, AMD's MI300X AI accelerator will start sampling with customers in the third quarter of 2023, while Nvidia's chips are already selling like hotcakes.

Catching Nvidia isn't going to be easy

It remains to be seen how AMD's AI-focused accelerators fare against Nvidia, but it is evident that the former is now playing catch-up in this space. Nvidia's existing data center accelerators are already in tremendous demand, which is why the chipmaker is busy expanding the supply of its chips. It is estimated that Nvidia is reportedly looking to procure an additional 600,000 of its A100 and H100 data center GPUs in 2023.

The A100 chip carries a price tag of roughly $16,000, while the H100 reportedly starts at a base price of $33,000. This indicates that Nvidia could witness additional revenue in the range of $9 billion to $20 billion this year if it can manage to procure the additional supply.

In simpler words, Nvidia and AMD are on different planes right now in the data center market. AMD is trying to get its AI-driven growth off the ground, while Nvidia has already raced ahead. What's more, Nvidia is looking to make its presence felt in server processors, a market that has played an important role in driving AMD's growth in recent years.

Nvidia's ARM-based Grace server chips are already sampling with customers. Given that the share of ARM processors in servers is expected to jump to 22% in 2025, according to market research firm TrendForce, as compared to this year's estimate of just 8%, Nvidia could continue to solidify its position in the data center space at AMD's expense.

Not surprisingly, Nvidia is expected to clock stronger growth as compared to AMD.

Source: YCharts.

Additionally, analysts are expecting annual earnings growth of just 9% from AMD for the next five years. Nvidia's earnings are expected to clock faster annual growth of 20% during the same period, though it could grow at a faster pace given the multiple catalysts it is sitting on.

In the end, it can be said that AMD doesn't seem to be in a position to become the next Nvidia right now. Of course, things could change if AMD's AI-focused products become successful. But it would be wise for investors to wait for that to happen since the tech stock is trading at a whopping 630 times trailing earnings, a multiple that makes Nvidia a better buy since it is trading at a relatively cheaper 230 times trailing earnings.