Rising by a whopping 70% year to date, Advanced Micro Devices (AMD 1.14%) stock is surging as investors begin to appreciate its potential in artificial intelligence (AI) hardware. While the company faces macroeconomic challenges in the PC market, it could make an excellent alternative to rivals like Nvidia (NASDAQ: NVDA) as its AI strategy begins to take shape.
Why Advanced Micro Devices?
Founded in the late 1960s, AMD is an American semiconductor company that focuses on designing and selling computer processors and related hardware at competitive prices. The company's well-known products include central processing units (CPUs) and graphics processing units (GPUs), which are typically used in PCs, video game consoles, data centers, and other demanding computing tasks.
The launch of OpenAI's generative AI chatbot, ChatGPT, has led to a surge of interest in hardware companies that can provide the processing power needed to train and run complex learning models. According to analysts at Next Move Strategy, the total AI market could reach a staggering $2 trillion by 2030. And companies like AMD can benefit tremendously, even if they capture just a small share of the total opportunity.
Near-term challenges can lead to long-term opportunities
To be fair, AMD has yet to fully benefit from these long-term tailwinds, as evidenced by its second-quarter earnings. Total sales declined 18% to $5.4 billion mainly because of weakness in the gaming and client revenue segments, which reflects a weaker market for graphics cards, PCs, and laptop processors. This challenge is somewhat outside the company's control because it is influenced by macroeconomic factors like inflation and high interest rates, which hurt consumer purchasing power.
That said, management believes the client processor market bottomed in the first quarter of 2023, and they expect macroeconomic conditions to improve in the second half of the year. Further, the company's long-term AI potential could soon materialize.
While AMD's rival, Nvidia, currently dominates the market for the highest-end AI GPU chips, with products such as the H100 and A100 (used to train ChatGPT), AMD may soon become a viable contender.
The company recently unveiled its M1300X, an AI chip (which it calls an "accelerator") designed for training large language models, which is expected to hit the market in the third quarter of 2023. With 192 GB of memory, the product compares favorably to Nvidia's flagship H100 (which supports just 120 GB) and could help boost AMD's share of this burgeoning industry. According to CEO Lisa Su, AMD sees AI as its "largest and most strategic long-term growth opportunity." And the M1300X could help make this a reality.
A more value-oriented alternative to Nvidia?
With a price-to-earnings (P/E) multiple of 26, AMD's stock is roughly in line with the S&P 500 average and downright cheap compared to Nvidia, which trades for a whopping 47 times forward earnings. While AMD's slower rollout of its competitive AI chips could explain some of the disparity in valuation, the market seems to be underestimating the company. AMD's new M1300x GPU could become a viable competitor to Nvidia's flagship chips, leading to healthy revenue growth in the coming quarters. Shares look like an excellent buy for value-conscious investors.
