No one can deny how vital GPUs (graphics processing units) are to anything involving artificial intelligence (AI). This hardware is used in conjunction with thousands of other GPUs to process the calculations necessary to train AI models. Usually, when discussing GPUs, most people talk about Nvidia (NVDA 1.99%). However, AMD (AMD -1.53%) also has a great GPU product and many other parts necessary to build a data center.
Although Nvidia is the GPU market leader, its stock is very expensive now. AMD's stock isn't valued nearly as high but will see a similar business boost thanks to AI. So could AMD be the next outstanding AI stock? Let's find out.
AMD is less concentrated in AI than Nvidia
AMD's business is much broader than Nvidia's, with products ranging from embedded processors, central processing units (CPUs), data processing units (DPUs), and other products that add to AMD's portfolio. That cuts both ways, as AMD is much more exposed to the consumer market than Nvidia is.
Nvidia wraps its consumer segment under one umbrella: Gaming. This segment brought in $2.2 billion and made up 31% of Nvidia's total revenue in the first quarter of fiscal year 2024 (ended April 30), while falling 38% year over year.
For AMD's consumer-facing revenue, it has clients (AMD CPUs utilized in PCs) and gaming (GPUs for gaming laptops and consoles). Client revenue was atrocious and fell to $739 million after generating $2.1 billion during 2022 -- a 65% tumble. Gaming was actually better compared to Nvidia, with revenue only falling 6% in Q1. These two combined make up 47% of AMD's Q1 2023 revenue. However, that figure was 68% in Q1 2022, so AMD becomes even more leveraged to the consumer when the PC market isn't seeing weakness.
So what's the big deal with that concentration? It demonstrates AMD isn't as levered to AI as Nvidia is. Both companies capture any AI revenue through their data center product lines, but other revenue unrelated to AI is also recorded in this segment. Still, with Nvidia's data center revenue rising 14% year over year and making up 60% of revenue versus AMD's nearly flat revenue rise with a 24% concentration, Nvidia is more highly leveraged to all things data center.
But is this really a bad thing? AI hype has driven Nvidia's stock price to extremely high levels, while AMD hasn't seen the same rise. If AMD can benefit incrementally from AI and investors can purchase it at a lower price, it may be the better AI investment, as it wouldn't be an all-or-nothing approach.
AMD stock isn't cheap, but it's more reasonable than Nvidia's
As previously mentioned, AMD's stock is substantially cheaper than Nvidia's on many valuation metrics.
However, Nvidia has earned a premium over AMD thanks to its stronger margin profile.
But is this margin profile that much better to earn Nvidia a near 6-times premium on its price-to-sales (P/S) ratio? I don't think so. While AMD may lean more toward consumer-facing products, it will still benefit from an AI rollout. However, if the AI trend is just a passing phase, AMD's stock isn't at nearly as much risk as Nvidia's from a fall due to an extremely high valuation.
Still, AMD's valuation has risen substantially since AI became an investment theme and is at the high end of its usual range. So while AMD might be a solid AI investment, don't expect the stock to take off like a rocket ship in a similar manner to Nvidia.
Investors will learn more about AMD's current state on Aug. 1. After we know more about how AI affects its business (if it is impacting it at all), investors could think about adding AMD shares. But until the consumer market recovers, AMD will continue seeing poor results.