The excitement around artificial intelligence (AI) that OpenAI's ChatGPT kicked off last year has helped propel Nvidia's (NVDA 6.18%) market capitalization to well over $1 trillion.
Nvidia's center GPUs are widely used to train advanced AI models, and it's struggling to get enough made to meet demand. Microsoft warned in its annual report that a new risk factor was its ability to secure enough GPUs to meet soaring demand for cloud AI services. Nvidia will sell every single data-center GPU it can make, and its pricing power right now is extreme.
Even with demand as high as it is, a $1 trillion valuation for Nvidia requires some mental gymnastics last seen during the dot-com bubble. Based on the average analyst estimate for the current fiscal year, Nvidia stock trades for about 26 times forward sales.
To be fair, Nvidia's opportunities today far exceed its opportunities at any time in the past. However, Nvidia's GPUs aren't going to be the only game in town indefinitely. Specialized AI chips designed by tech giants including Alphabet and Amazon have already gone through multiple generations, fellow GPU provider Advanced Micro Devices is set to up its AI game later this year with new data center GPUs, and Intel (INTC -9.20%) has seen its AI chip pipeline explode as customers seek out its Gaudi2 AI chips.
While AI will produce many winners, Intel appears uniquely positioned to emerge as one of the biggest winners in the long run.
Betting big on manufacturing
Intel's AI chips, which include data-center GPUs and its Gaudi line of special-purpose processors, are a big opportunity for the company. But an even bigger opportunity is manufacturing.
Currently, Taiwan Semiconductor Manufacturing has a lock on semiconductor manufacturing for any chip that needs the most cutting-edge manufacturing tech. Nvidia's GPUs and other AI-focused chips certainly qualify. Intel is looking to change this situation. The company is building its own foundry business, and once it completes its current manufacturing roadmap, it expects to have regained its manufacturing edge over TSMC.
Intel's 18A manufacturing process, scheduled to be ready for production by the end of 2024, will mark an inflection point for the company. If Intel can succeed in regaining its manufacturing edge, any company that uses TSMC for its most advanced manufacturing processes would be at a disadvantage if it didn't consider Intel as a manufacturing partner.
Intel already has multiple agreements in place that set the stage for rapid-fire growth for the foundry business in 2025 and beyond. A partnership with Arm will optimize the Intel 18A process for Arm chips, with an initial focus on smartphone chips that could later expand to include data center, Internet of Things, automotive, aerospace, and government applications.
Intel is also at the center of the U.S. Department of Defense's RAMP-C program, which is aiming to create a U.S.-based foundry ecosystem for chips and products required for DoD systems. Intel's 18A process is front and center, and RAMP-C customers are now developing test chips.
Intel expects the global market for AI chips to top $40 billion by 2027. That figure includes CPUs, which can be used for lighter tasks, and dedicated AI accelerators that can handle training the largest AI models. Intel will tap into this market by selling some of these chips directly, and eventually by manufacturing others for third parties.
The size of the overall foundry opportunity for Intel over the long run is enormous. While estimates vary, the foundry market is expected to be worth $143 billion this year and grow to $204 billion by 2028, according to Mordor Intelligence. Demand for high-value AI chips may pour additional fuel on the fire.
If all goes according to plan, Intel's foundry business could be bringing in tens of billions of dollars in revenue annually in the long run. The company is valued at a pessimistic $150 billion right now, while foundry market leader TSMC is worth more than $500 billion.
The path for Intel to overtake Nvidia in terms of market capitalization requires Intel's foundry business to succeed and drive big gains for the stock, and for Nvidia's valuation to come back to earth. Even if this scenario doesn't quite play out, Intel stock remains a great opportunity for investors. The foundry opportunity is enormous, and Intel is so far on track to deliver on its promises to regain its manufacturing lead.
