In 2023, artificial intelligence (AI) quickly rocketed to the forefront of investors' minds and pocketbooks. And shares in the industry leader, Nvidia (NVDA -1.05%), ballooned 237% over the last 12 months as its revenue and profits soared. This stemmed from rising demand for the company's graphics processing units (GPUs) for running and training the most advanced AI applications.
Advanced Micro Devices (AMD 0.07%) stock rose 137% in the same period. But unlike Nvidia, AMD's rally was more based on future expectations (third-quarter revenue grew just 4% compared to Nvidia's 206%). So, in 2024, AMD will have to prove itself deserving of all the hype.
A history of rivalry
Since it acquired ATI Technologies in 2006, AMD has been a direct competitor to Nvidia in the market for GPUs. These computer chips work by running multiple tasks simultaneously (parallel processing) -- a technique that turned out to have huge potential for training the vast amounts of data required for generative artificial intelligence applications.
And the potential market for AI-capable enterprise GPUs makes the video game industry look like a chump change.
According to AMD, the $45 billion AI chip market could rise almost tenfold to $400 billion by 2027. To take advantage of the opportunity, AMD has released its MI300X family of chips designed to compete with Nvidia's flagship H100 for AI data center clients.
What do the new products mean for AMD's operations?
AMD's management expects the new chips to generate $2 billion in additional sales in 2024, which is somewhat modest considering the potentially huge total addressable market. However, analysts at Barclays believe this number could be closer to $4 billion. And this would represent an 18% growth rate compared to AMD's trailing-12-month revenue, assuming all its other businesses remain constant.
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That's a lot of growth to get from one type of product. And if AMD's lofty projections about AI chip demand hold true, investors should expect sales to scale up dramatically between 2025 and 2027.
But even in the best-case scenario, AMD still lags behind Nvidia, which saw its data center chip business add $4.9 billion in sales between the second and third quarters of calendar year 2023 alone.
AMD is poised to be a solid choice
With a forward price-to-earnings (P/E) multiple of 43, AMD's stock is dramatically more expensive than Nvidia, which trades for a comparatively modest 29 times projected earnings. This disparity is surprising considering Nvidia's significantly faster growth rate and faster product release/update cycle, which can lead to better pricing power.
That said, investors shouldn't see artificial intelligence as a zero-sum game. The market is growing fast enough for many companies to succeed. And although later to market than its rival, AMD could establish a niche through lower prices and better value for money. The upstart could make a solid pick as part of a balanced and diversified investment portfolio.
