Nvidia (NVDA 2.13%) and Advanced Micro Devices (AMD 0.79%) have enjoyed contrasting fortunes on the stock market in 2024 so far. While one of these semiconductor stocks delivered stellar gains, the other has not received much love on Wall Street.
Nvidia stock is up more than 116% in 2024, while AMD has underperformed the PHLX Semiconductor Sector index by a wide margin. This is evident from the chart below.
Nvidia's stellar gains can be justified by the impressive growth that it has been clocking in recent quarters thanks to the healthy demand for its artificial intelligence (AI) chips. In the first quarter of fiscal 2025 (which ended on April 28), the company's revenue increased a stellar 262% year over year to $26 billion. The company also witnessed a whopping 461% year-over-year jump in its non-GAAP (adjusted) earnings per share.
However, the solid rally in Nvidia stock has made it quite expensive. It is now trading at 63 times trailing earnings and 33 times sales. AMD's weak performance on the market means that investors can buy it at less than 10 times sales right now. Also, AMD's forward earnings multiple of 40 is almost in line with Nvidia's forward price-to-earnings ratio.
Let's look at the reasons why buying AMD could be a smart move for investors who have missed out on Nvidia's terrific rally.
AMD's AI-focused data center business is gathering momentum
AMD released its second-quarter 2024 results on July 30. The chipmaker's overall revenue increased 9% year over year to $5.84 billion, while adjusted earnings jumped eightfold from the year-ago period to $0.16 per share. The numbers were ahead of consensus expectations, and more importantly, AMD's guidance also exceeded Wall Street's estimates.
NASDAQ: AMD
Key Data Points
The company has guided for $6.7 billion in revenue in the current quarter at the midpoint of its guidance range. That would be a year-over-year improvement of 16%, indicating that AMD's growth is set to accelerate in the current quarter. Analysts were expecting AMD to guide for $6.62 billion in revenue in the second quarter.
The biggest reason why AMD is forecasting its Q3 revenue growth to accelerate is because of the solid momentum that its data center business has gained. The company reported record data center revenue of $2.8 billion in the previous quarter, an increase of 115% from the year-ago period. This robust growth was driven by the growing demand for AMD's Instinct data center graphics cards that are being deployed for AI training and inferencing.
The chipmaker pointed out that it sold $1 billion worth of its MI300X AI accelerators last quarter. What's more, it has raised its full-year AI graphics processing unit (GPU) forecast to $4.5 billion as compared to the earlier estimate of $4 billion. However, it won't be surprising to see AMD finishing the year with stronger data center GPU revenue as the company says it is "working very closely with our system and cloud partners to ramp availability of MI300 solutions to address growing customer demand."
There is a good chance that AMD could be able to ramp up the output of its AI GPUs as its foundry partner Taiwan Semiconductor Manufacturing plans to increase its advanced packaging capacity by an annual rate of 60% through 2026 so that more AI chips can be manufactured.
Additionally, investors can expect AMD to continue clocking healthy growth in both data center GPUs and central processing units (CPUs) in the long run as the overall market for AI accelerators is estimated to grow at an annual rate of 27% through 2029, generating almost $373 billion in revenue at the end of the forecast period.
With AMD gaining traction in AI chips and set to grow at a faster pace in the current quarter, it is easy to see why investors are upbeat about its prospects and why the stock jumped more than 6% following its earnings report.
Investors can expect stronger growth from AMD
Analysts expect AMD's top line to jump almost 13% this year to $25.6 billion. However, as the following chart indicates, it is expected to clock faster growth in 2025 and report healthy double-digit growth in 2026.
AMD Revenue Estimates for Current Fiscal Year data by YCharts
Even better, analysts are forecasting AMD's earnings to grow at a solid pace following this year's estimated jump of 27% to $3.38 per share.
AMD EPS Estimates for Current Fiscal Year data by YCharts
AMD could sustain this impressive growth over the long run, with its earnings expected to increase at a compound annual growth rate of 33% for the next five years. As such, investors looking for a cheaper alternative to Nvidia to capitalize on the AI revolution would do well to buy AMD as it could soar impressively in the long run thanks to the growing demand for its AI chips.
