Many players are participating in the high-growth field of artificial intelligence (AI). But two in particular stand out as they make key tools critical to the development and functioning of AI. I'm talking about chip designers Nvidia (NVDA 1.53%) and Advanced Micro Devices (AMD 3.46%).
Nvidia is the chip leader, offering the world's most powerful graphics processing units (GPUs), and this has resulted in incredible growth over the past few years. AMD has proven it can compete with this market leader as it's launched chips rivaling those of Nvidia and has been announcing soaring demand and revenue. And investors can count on both of these companies for a clear picture of the current and, potentially, future AI market.
AMD was the first to report quarterly earnings during the current earnings season, and the company announced record revenue for the quarter and the full year, as well as strong profitability. Chief Lisa Su even said that, based on the current situation, AMD expects "significant" sales and revenue growth this year.
In spite of these results, though, AMD stock sank 17% in the trading session following the report. Is this stock performance, following a strong earnings report, a warning for Nvidia shareholders ahead of the market giant's Feb. 25 earnings report? Let's find out.
Image source: Getty Images.
AMD's soaring earnings
So, first, let's consider AMD's report. As mentioned, overall, the company delivered very positive news. In the quarter, revenue climbed 34% to more than $10 billion, surpassing analysts' estimates. Gross margin expanded to 54% from 51% a year ago, showing greater profitability on sales. And Su said the company is on track to reach its targets, such as increasing revenue at a more than 35% compound annual growth rate over the coming three to five years.
"We are entering a multiyear demand super cycle for high-performance and AI computing," Su said during the earnings call.
Still, the stock tumbled in the following trading session amid disappointment about the company's first-quarter forecast. Though AMD's prediction for about $9.8 billion in revenue beat expectations of $9.3 billion, some analysts were expecting even more growth, especially considering the great demand for AI chips at the moment.
Now, let's turn to Nvidia. The company is set to report fiscal 2026 fourth-quarter and full-year earnings on Feb. 25 after the stock market closes. The chip giant has a strong track record of surpassing analysts' estimates, and in recent times, Nvidia has spoken of soaring demand for its GPUs. The average analyst estimate calls for revenue to climb 67% year over year to more than $65 billion in the quarter.
NASDAQ: NVDA
Key Data Points
TSMC speaks of strong demand
Messages from others in the industry also offer us reason to be optimistic. For example, Taiwan Semiconductor Manufacturing, the manufacturer of Nvidia's chips, spoke of strong demand when it reported earnings a few weeks ago.
So, it's very likely that Nvidia will deliver a good deal of positive news. But will investors, as in the case of AMD, choose to focus on any potential weakness or risk -- even a general concern about AI spending down the road -- and sanction the stock? It's possible. In recent months, investors have worried about the high valuations of AI stocks and the sustainability of these levels. Concerns about a possible AI bubble even surfaced back in November.
All of this means that, even if Nvidia presents a fantastic report, in the short term, there's a possibility its stock performance may not reflect the positive picture. Now here's the good news: Any short-term turbulence doesn't change the long-term AI landscape or Nvidia's prospects in this market over time. And any dip in the stock is actually positive for us as investors, as it offers us the opportunity to get in on the shares at a reasonable price.
So, AMD's drop may be a warning for Nvidia shareholders in the short term, suggesting the stock may face turbulence even if earnings numbers are strong. But that's OK -- Nvidia still is likely to score a win over the long term, and that's great news for investors who hold onto this AI leader.
