So far, the artificial intelligence (AI) boom has boosted hardware providers more than the software companies that buy their products. And with its shares up by an impressive 71% over the last year, Advanced Micro Devices (AMD +3.55%) and its shareholders have certainly benefited from this trend.
But with an uncomfortably high valuation and stiff competition from rivals like Nvidia, can AMD maintain its market-beating performance? Let's explore what the chipmaker's next five years could have in store.
NASDAQ: AMD
Key Data Points
AMD's complicated artificial intelligence outlook
Since it acquired ATI Technologies in 2006, AMD has been a direct competitor to Nvidia in the market for graphics processing units (GPUs). These advanced computer chips excel at processing multiple tasks simultaneously and were originally used for rendering video game visuals before finding additional uses in cryptocurrency mining and, finally, generative artificial intelligence training and inference.
Under the leadership of CEO Lisa Su, AMD has begun to put more priority on the GPU side of its business, ramping up production of its family of AI-capable MI300 Instinct chips for data center clients this year.
But if you think this will quickly turn AMD into the next Nvidia, think again. Industry publication Tom's Hardware estimates that AMD's new chips sell for just one-fourth the price of Nvidia's flagship H100 despite their similar performance. And this means less growth and lower margins.
To put this in perspective, AMD's fourth-quarter data center revenue increased by 38% year over year to $2.3 billion. For comparison, Nvidia's data center business soared 409% year over year to $18.4 billion in the same period.
What could change in the next five years?
AMD is selling its cutting-edge AI GPUs for dramatically less than Nvidia. On the surface, this suggests the company is trying to pursue a strategy of cost-effectiveness and value, which typically leads to higher sales volumes. But the reality may be a little more complicated.
Image source: Getty Images.
For starters, Nvidia has built a wide economic moat around its chips by creating an ecosystem of associated software such as CUDA, a programming interface designed to work with its hardware. Many companies and their developers have already built their AI infrastructure around Nvidia's hardware, leading to high switching costs and other challenges if they incorporated rival chips.
On top of this, Nvidia isn't standing still. In March, the company announced its new Blackwell platform, designed to train generative AI models at a fraction of the cost of its predecessor. Nvidia's faster development cycle could mean that AMD will be stuck playing a game of catchup -- putting further pressure on its pricing power, growth, and margins.
Over the next five years, AMD should be able to slowly accumulate market share. However, it looks unlikely to replicate Nvidia's explosive growth. For AMD, AI chips are shaping up to be an important -- but probably not transformational -- part of its overall business.
Is AMD stock a buy?
With a forward price-to-earnings (P/E) multiple of 46, AMD stock is more expensive than Nvidia, which trades for just 35 times its projected 12-month earnings. This valuation is hard to justify, considering that Nvidia is growing significantly faster than AMD and has a deeper economic moat.
That said, the AI chip industry looks big enough for both companies to generate significant long-term value -- especially if this burgeoning technology lives up to analysts' lofty expectations. And while AMD stock looks unlikely to outperform Nvidia over the next five years, the company could still have a place in your diversified investment portfolio.
