Semiconductor stocks have been on fire in 2023, which may seem a bit surprising at first, given the slowdown in chip demand on account of weakness in the smartphone, personal computer (PC), and data center markets. The PHLX Semiconductor Sector index is up an impressive 48% so far this year, far outpacing the S&P 500 index's gains of 18% over that time.
The solid gains were sparked by the sudden spurt in the adoption of artificial intelligence (AI) applications, a technology that has opened a whole new growth frontier for chipmakers. After all, the global AI chip market is expected to grow at a healthy annual pace of 30% over the next decade and generate $227 billion in revenue in 2032, according to Precedence Research.
This explains why semiconductor stocks, such as Nvidia (NVDA 3.34%) and Intel (INTC 0.46%), are in great demand this year. While share prices of Nvidia more than tripled, Intel stock gained 32%. However, Nvidia's terrific rally made the stock quite expensive, while Intel can be bought at a much lower multiple.
Does this make Intel a better buy for investors who want to take advantage of the AI boom but don't want to pay a hefty valuation? Let's find out.
The case for Nvidia
Nvidia is about to witness windfall gains thanks to the fast-growing demand for AI chips. The company will release its fiscal 2024 second-quarter results later this month, and it is forecast to report a 64% year-over-year jump in revenue to $11 billion based on its guidance. It is worth noting that Nvidia's revenue fell 13% year over year in the fiscal first quarter (which ended on April 30) to $7.2 billion.
However, the race to train large language AI models and deploy generative AI applications such as chatbots has created a huge demand for Nvidia's graphics cards, which reportedly command a waiting period now. That's not surprising as Nvidia is expected to corner at least 90% of the market for AI chips, according to Citi Research.
Advanced Micro Devices, its nearest competitor in the graphics processing unit (GPU) market, isn't expected to dent Nvidia's commanding position in the AI chip market. That's because AMD's chips are said to deliver only 80% of the performance of Nvidia's hardware.
Meanwhile, Vijay Rakesh of Mizuho Securities believes that Nvidia is at the beginning of a massive growth curve. He expects the company to generate a whopping $300 billion in AI-driven revenue by 2027, with a market share of 75% in AI chips. That points toward a tenfold jump in Nvidia's estimated AI revenue of $25 billion to $30 billion in 2023, as per Rakesh's estimates.
So, Nvidia seems capable of sustaining its newly found momentum thanks to the booming demand for AI chips. This explains why the company is expected to deliver 46% revenue growth in fiscal 2024 to $39 billion despite a tepid start to the year in Q1. Analysts expect the company to maintain its momentum in fiscal 2025 with 35% revenue growth, and the good part is that Nvidia could keep growing at such impressive levels for a longer time thanks to the huge revenue opportunity in AI chips.
The case for Intel
Intel stock has appreciated nicely this year, even though the PC market's weakness weighed heavily on the company's financial performance. This is evident from Intel's second-quarter results. Chipzilla's revenue was down 15% year over year to $12.9 billion. Its non-GAAP (adjusted) earnings fell 54% over the prior year to $0.13 per share.
Still, investors cheered Intel's results as the rate of decline in the company's PC business slowed down remarkably. The company's guidance for the current quarter suggests that it is getting out of the rut it is in. Intel expects Q3 revenue of $13.4 billion at the midpoint of its guidance range, which points toward sequential growth. The year-over-year rate of decline in revenue would slow down further to 12% at the midpoint, though there is a chance that it could do better thanks to AI.
Intel revealed that its AI chips saw healthy demand, and the company has already built a $1 billion revenue pipeline in this niche. That could keep growing at a nice pace as Intel sees a huge end-market opportunity in the data center chipset market.
According to Intel's internal estimates, the market for server processors, graphics cards, field-programmable gate arrays (FPGAs), and application-specific integrated circuits (ASICs) for deployment in data centers and AI servers could be worth $110 billion in 2027 as compared to $40 billion last year. The company adds that 60% of this demand is likely to be fulfilled by general computing chips such as CPUs (central processing units) that Intel sells.
Given that Intel commands more than 82% share of the server processor market, the company is in a nice position to capitalize on the AI chip opportunity. This could bring about a turnaround in Intel's fortunes and help the company regain its mojo.
INTC Revenue Estimates for Current Fiscal Year data by YCharts.
The verdict
While Intel is currently working toward a turnaround, Nvidia is in red-hot form. Not surprisingly, there is a big difference in the valuations of both chipmakers. Nvidia has a price-to-sales ratio of 45, which is way higher than Intel's sales multiple of 2.7.
Nvidia can justify its rich multiple by sustaining a strong pace of growth in the long run, and that could tempt investors looking for a growth stock to put their money in the company. However, investors with a lower risk appetite who want to benefit from the AI boom but aren't willing to pay an expensive multiple can consider keeping Intel on their watchlists as a potential turnaround in the company's fortunes could send the stock soaring.
