2023 was an exciting year for technology investors. The launch of ChatGPT in late 2022 opened the floodgates of interest in generative artificial intelligence (AI), and Advanced Micro Devices (AMD 1.14%) was a big beneficiary of the trend -- with its share price more than doubling year to date. Going into 2024, the legendary chipmaker is on track to prove itself worthy of the recent bull run. Let's discuss three reasons why its shares are still a long-term buy.
1. New AI chips can supercharge growth
According to AMD's CEO, Lisa Su, the data center AI chip industry could surge from its current value of $45 billion to a jaw-dropping $400 billion by 2027. AMD's rival, Nvidia, currently dominates the opportunity with a market share of 80% because of its advanced graphics processing units (GPUs) like the h100 and a100, which trained ChatGPT. But AMD aims to capture a slice of this fast-growing pie.
The company is positioning itself to compete through its new MI300 family of chips, which it claims can outperform Nvidia's flagship h100 in training and inference -- the process of running generative AI models.
AMD has already secured big-name clients like Meta Platforms, OpenAI, and Microsoft, and these early adopters serve as a convincing vote of confidence in the MI300's quality. Investors should expect the new products to start lifting AMD sales significantly in 2024 and beyond.
While Nvidia will likely reestablish its technical lead over AMD with new chip releases of its own, there is still plenty of room for both players in the market because of its rapid expansion and high prices. According to CNN, the AI chip market faces widespread shortages and bottlenecks. And AMD's MI300 can help solve this problem for consumers.
2. The legacy businesses are in recovery mode
While AMD's burgeoning AI business is taking the spotlight, investors shouldn't lose sight of the company's legacy operations related to consumer and enterprise processors and graphics.
The company faced challenges in 2022 from the post-pandemic slowdown in PC sales, inflation, and rising interest rates, which crushed people's purchasing power. Like many U.S. tech companies, it also faced ongoing challenges in China, where government policy restricts the export of America's most advanced computer hardware. The good news is that many of these headwinds seem to be in the rearview mirror.
Image source: Getty Images.
While AMD's total revenue only grew by 4% year over year to $5.8 billion, it enjoyed a sharp recovery in the client segment, which refers to chips for PCs and laptop makers.
Sales in this business rose 42% to $1.5 billion because of the popularity of AMD's new Ryzen 7000 processors for PCs. The company has also stabilized its bottom line. Third-quarter operating income surged from a loss of $64 million to a gain of $224 million through cost-cutting and increasing sales of its higher-margin hardware. And while China remains an overhang, the company is considering making specific, less advanced chips for the country to comply with U.S. export controls.
3. Shares may be a cheaper alternative to Nvidia
When it comes to AI chips, Nvidia remains the elephant in the room. With its advantages in market share and development speed, the GPU specialist will likely remain the biggest winner in the long-term opportunity. But that doesn't mean investors should ignore other options. With its price-to-sales (P/S) multiple of 9.9 compared to Nvidia's 26.7, AMD is cheaper than its rival based on backward-looking metrics.
To be fair, both companies' "true" valuations may have to do more with how they are expected to perform in the future. And with a much faster growth rate, Nvidia still has the edge. But as the upstart, AMD boasts the potential to exceed analysts' expectations with its new AI chips, making it an under-the-radar way to bet on this fast-growing market in 2024 and beyond.
