With its shares up by 234% year to date, Nvidia highlights the potential of investing in artificial intelligence (AI). But after such a big bull run, investors might be looking for more under-the-radar ways to bet on this transformative opportunity.
Advanced Micro Devices (AMD 0.03%) and Adobe (ADBE 1.52%) are in comparatively early stages of monetizing their AI potential. Let's discuss why they could make great alternatives to the industry leader.
1. Advanced Micro Devices
While chipmaker AMD hasn't received as much AI-related hype as its rival Nvidia, a 91% year-to-date rally in its stock suggests the market is beginning to take notice. AMD aims to bring much-needed competition to AI chips, and management expects this vertical to be key to its long-term growth strategy.
NASDAQ: AMD
Key Data Points
According to CEO Lisa Su, AI is AMD's largest and most strategic long-term growth opportunity. And she expects the AI data-center chip market to have a compound annual growth rate of 50% from $30 billion this year to $150 billion in 2027.
To tackle the opportunity, AMD has developed new chips, such as the MI300x, designed to compete with Nvidia, which has an 80% market share.
Unlike Nvidia, which grew sales by 206% year over year in its most recent quarter, AMD has been slower to see AI-related impact. The company's third-quarter revenue grew by just 4% year over year to $5.8 billion.
That said, AMD expects to start ramping up AI chip production in the fourth quarter, so investors should look for faster top-line growth over the coming months.
With a forward price-to-earnings (P/E) ratio of 32, AMD stock trades at a premium over the S&P 500's average of 25. But this looks fair, considering it has the opportunity to benefit from such a large tech megatrend.
2. Adobe
With shares up 84% this year, Adobe hasn't missed out on the AI hype market, which has boosted interest in many technology-related stocks. And although the creative-software specialist isn't a pure play on AI, it can use the new technology to strengthen its economic moat and power long-term growth.
Adobe is known for its creative productivity tools like Photoshop, designed to edit images, and Premiere Pro, designed for video. This niche is hugely synergistic with generative AI -- a subset of the technology that is designed to create original content based on its training from large data sets.
This year, the company began rolling out Firefly, a family of AI tools enabling users to use text prompts to create and manipulate content.
Image source: Getty Images.
Adobe isn't the only company offering this type of generative AI. Rival platforms like Midjourney and OpenAI's DALL-E have similar functionality. But Firefly is unique because it is trained on Adobe's library of licensed content, which preempts possible legal challenges and makes it ideal for corporate users.
Firefly also benefits from being attached to Adobe's Creative Cloud software bundle, which has over 30 million subscribers.
Adobe's third-quarter revenue increased 10% to $4.89 billion, based on healthy demand for its creativity software. The stock's above-average forward P/E of 34 suggests the market expects its AI efforts to power future growth. And it looks likely.
An alternative to Nvidia?
So far, Nvidia has been the biggest winner in the AI hype cycle. And there is no reason to think that will change anytime soon. That said, the market already recognizes its potential, therefore much of the growth is already priced into the stock.
Under-the-radar AI companies like AMD and Adobe might be the next to experience a boom as they further incorporate this technology into their long-term strategies. It's not too late to bet on their success.
