The realm of artificial intelligence (AI) technologies has surged forward with breathtaking speed since the kickoff of 2023. The groundbreaking arrival of ChatGPT towards the end of 2022 ignited the fervor of investors and consumers worldwide, shedding light on the colossal potential of generative AI technologies.
Multiple corporations are channeling significant investments to carve out a competitive advantage in the AI race, a domain that industry projections suggest could burgeon into a nearly $2 trillion behemoth by the decade’s end. The burgeoning landscape of AI-centered platforms has propelled the need for high-performance semiconductor chips, particularly graphics processing units (GPUs), essential to fuel these breakthrough technologies. Consequently, chip stocks like Nvidia (NVDA) and Advanced Micro Devices (AMD) have ascended to the summit as premier investment opportunities.
The Reign of Nvidia in the AI Chip Domain
Nvidia presently commands the AI chip market with a staggering market share of approximately 90%, fuelling the tech stock to skyrocket by over 650% in the preceding two years.
In stark contrast, AMD stock has furnished a return of 67.5% during the same chronological epoch. Now, it’s time to unearth which AI-centric chip stock emerges as the superior bet at contemporary valuations.
AMD’s Strategic Move: Acquiring ZT Systems
Only recently, Advanced Micro Devices revealed its strategic blueprint to acquire ZT Systems, a prominent server company, in a $4.9 billion deal aimed at expanding its AI chip portfolio. The acquisition will be financed with 75% in cash and the remaining in stock. Bolstered by a cash reserve of $5.34 billion as of the conclusion of Q2, AMD is poised to consummate the acquisition effortlessly sans the necessity of raising supplementary capital.
AI entities demand substantial computational prowess to train and operate their sophisticated platforms, intensifying the requirement for robust server systems. This acquisition will empower AMD to hasten the deployment of its GPUs at scale, cater to the burgeoning demand from tech titans like Microsoft (MSFT), and augment its revenue streams.
ZT Systems rakes in annual sales worth $10 billion, with the pact anticipated to be sealed by the first six months of 2025.
As per consensus estimates, AMD is anticipated to amass sales growth of 1.2% to $22.95 billion in 2024 and a consequential surge of 28.4% to $29.5 billion in 2025. Priced at 49.7 times forward earnings, AMD’s stock appears relatively expensive.
Out of a panel of 36 analysts vested in AMD stock, 29 advocate a “strong buy,” one leans towards a “moderate buy,” and six hold a “hold” stance.
Decoding the Valuation Conundrum of Nvidia
Nvidia experienced a fleeting moment in the sun earlier this summer as the largest company by market cap, propelled by its astronomical surge in share prices. The limelight has panned towards the debut of Nvidia’s Blackwell chips, with industry behemoths like Meta (META), Alphabet (GOOG) (GOOGL), and Microsoft placing monumental orders worth billions of dollars for these revolutionary products. Alas, a suspected design flaw has deferred the chip shipments, inducing a slump in Nvidia’s stock price.
Relative to AMD, Nvidia is sprinting ahead at a vastly accelerated pace. The robust demand for GPUs has enabled Nvidia to elevate revenue by 93% and operational income by 150% over the past year. Moreover, its profit growth has propelled Nvidia to magnify free cash flow by 147% in this timeframe.
Prognosticators on Wall Street envisage Nvidia’s sales to climb from $55.7 billion in fiscal 2024 (ending in January) to an impressive $150.6 billion by fiscal 2026. The adjusted earnings are slated to swell from $1.19 per share to $3.40 per share within this horizon.
Among the cadre of 39 analysts casting their gaze on NVDA stock, 34 vouch for a “strong buy,” two propose a “moderate buy,” and three advocate a “hold” stance. The average target price for NVDA stock stands at $141.65, hovering an upside potential of 9.5% from prevailing levels.
A Final Word: The Verdict
Industry mavens foresee Nvidia reaping nearly $106 billion from data center sales this year, a stark contrast to AMD’s humbler AI chip sales projection of $4.5 billion. Both Nvidia and AMD trade at a markdown concerning consensus price target predictions. However, if a solitary choice must be made, my chips are going with Nvidia, basking in its eminent posture in the GPU domain, accelerated growth rates, and deflated valuation.