Alphabet (GOOG +1.24%)(GOOGL +1.36%) is a potentially big player in the artificial intelligence (AI) market. It has been working on developing its own chatbot, Gemini, while also looking to enhance its existing products and services with AI capabilities.
But it faces risks, too. The big one is that chatbots may end up reducing the traffic that goes to Google to search for answers to queries. After losing a key antitrust case involving Google Search, there's also the risk that regulators may opt to break up Alphabet's business or at least change how it operates. Its dependence on the ad market means there could be a lot of volatility if a recession hits or there's an increase in competition.
In the past, I was more bullish on Alphabet's growth prospects in AI. However, given these risks, I think there's a much better option for AI investors to consider today: Advanced Micro Devices (AMD +4.05%), better known as just AMD.
AMD's business is less complex and may have better growth prospects
A lot of companies are spending feverishly on AI these days. From upgrading their IT infrastructure to buying chips, AI spending is surging. Even Alphabet's CEO, Sundar Pichai, recently acknowledged that it's possible the company would spend too aggressively on AI, stating, "When we go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us here."
Alphabet may benefit from AI spending down the road, but today, its revenue comes primarily from ads. In its most recent quarter, which ended on June 30, advertising revenue totaled $64.6 billion and rose by 11% year over year. It accounted for 76% of the company's total revenue ($84.7 billion). That ad revenue is primarily from YouTube and Google Search. AI chatbots, however, could simplify searches for people, potentially giving users less of a reason to have to search on Google or YouTube.
AMD, meanwhile, has a more direct path to AI-related growth. The company expects to generate $4 billion in AI chip sales this year, recently boosting its guidance by $500 million. Its chips could be in high demand as tech companies look for cheaper alternatives to Nvidia's products. AMD has been a bit late to the game, but it is planning to launch new AI chips in the next couple of years, including the MI350 in 2025, followed by the MI400 the following year.
NASDAQ: AMD
Key Data Points
The company's growth rate hasn't been all that exciting, with net revenue up just 6% through the first six months of 2024, totaling $11.3 billion. But the company is expecting 16% revenue growth for the current quarter. CEO Lisa Su is optimistic for more AI-powered growth: "Our AI business continued accelerating, and we are well positioned to deliver strong revenue growth in the second half of the year led by demand for Instinct, EPYC, and Ryzen processors."
As demand for AI chips remains strong, AMD could be in a great position to benefit from those opportunities.
These companies could be going in very different directions
Alphabet is doing well right now, and it's growing at a more impressive rate than AMD. But it's debatable how long that may last. Not only is AMD's business in the midst of accelerating, but Alphabet's growth prospects could also take a hit, especially if regulators break up the business.
The company's growth rate could also slow down if the ad market softens (due to a recession) or advertisers simply have more options. Social media site Reddit, for example, could pose a significant threat in the not-too-distant future as it grows its ad business and allows advertisers to target users based on topics and interests rather than data. It's a potentially underrated risk, which exacerbates Alphabet's exposure and dependence on the ad market.
If you're bullish on AI, go with AMD instead of Alphabet
AMD is a better AI stock to own. It's more likely to benefit directly from an increase in AI-related spending with chips that can help businesses develop next-gen models and technologies. Although its growth rate hasn't been all that impressive lately, that could quickly change as it rolls out new AI chips.
