Chip stocks have captivated Wall Street since the start of last year. An explosion of growth in the artificial intelligence (AI) market highlighted the crucial role chipmakers have to play in the industry's development. As a result, companies like Nvidia and Advanced Micro Devices (AMD -1.21%) rallied and made for attractive ways to invest in the budding AI industry.
Yet AMD's stock is arguably the more compelling buy between the two. The company's market cap is currently $255 billion, compared to Nvidia's, which reached over $3 trillion this year. The considerable difference suggests AMD could have far more room to run than Nvidia in the coming years.
These companies are active in the same high-growth industries. Meanwhile, AMD is investing heavily into AI to catch up to its rival and is already seeing promising results, according to this latest earnings release.
So, here's why now is an excellent time to buy AMD stock before it's too late.
AMD's rivalry with Nvidia is heating up after a recent acquisition
Nvidia's business surged last year as its AI graphics processing units (GPUs) became the go-to for many developers worldwide. The chipmaker's success shed light on how far AMD fell behind in the industry, unable to immediately begin supplying its chips to AI-minded companies. However, AMD hastily worked to catch up, unveiling a line of AI GPUs that attracted prominent cloud companies like Microsoft's Azure, Meta Platforms, and Oracle.
Meanwhile, a Reuters report from Aug. 19 revealed AMD is bolstering its competitive edge by acquiring server maker ZT Systems for $5 billion. The move will expand AMD's access to powerful AI chips and hardware, strengthening its position against Nvidia. Training AI models requires intensive workloads, combining thousands of chips to power massive server systems. ZT Systems should help AMD do this more efficiently, allowing it to release its latest AI GPUs more quickly at a scale necessary for cloud platforms like Azure.
"The main way (ZT Systems) is additive to the company is we sell more GPUs," AMD CEO Lisa Su said. AMD expects the purchase to positively affect its earnings as early as the end of 2025.
A new acquisition that will expand AMD's AI chip output strengthens the bullish argument for its stock. One of the biggest differences between AMD and Nvidia is the scale of their businesses, suggesting this is a step in the right direction.
A diversified business model that exposes investors to multiple areas of tech
Data from Grand View Research shows the AI market hit nearly $200 billion last year and is on track to reach just under $2 trillion by 2030. As a result, it's no surprise that AMD dove head-first into the industry. However, the company has a long history of growth before its recent AI expansion, providing growth catalysts throughout tech.
As a leading chipmaker, AMD's hardware powers products throughout the industry, from data centers to video game consoles, custom-built PCs, laptops, and more. In fact, the infotainment consoles in the Tesla Model S and X are equipped with AMD's Ryzen-embedded APU and its RDNA2-based GPU for access to high-performance gaming. Meanwhile, the company is the exclusive supplier of chips to Sony's PlayStation 5 and Microsoft's Xbox Series X|S, illustrating its powerful role in console gaming.
AMD's business staunchly prioritizes AI, and rightly so. Data center revenue rose 115% in Q2 2024 and earned nearly half of the company's total revenue. However, it's also worth noting that AMD supplies its chips to multiple companies outside of AI, allowing investors to profit from the development of different sectors.
Data by YCharts
AMD's forward price-to-earnings (P/E) ratio is high at 46. However, that figure aligns with its 12-month average, suggesting its stock hasn't lost value. The same is true for its forward price-to-sales (P/S) ratio.
The company's stock is trading at a premium, yet I'd argue its growth potential in AI and tech makes it worth its current price tag and a no-brainer buy right now.
