With the launch of OpenAI’s chatbot, ChatGPT, Artificial Intelligence (AI) Technology has taken the investment world by storm. And few companies have benefited more than tech giants Nvidia, which is up a whopping 218% year-to-date. But Advanced Micro Devices (AMD -0.73%) This opportunity also benefits. Let’s discuss why it can be an excellent option for value-oriented investors.
The AI market is big enough for competition
AI is perhaps as transformative a tech megatrend as the Internet and smartphones. And it’s growing fast. According to Statista, the global AI market could reach $2 trillion by 2030 as businesses implement the technology in use cases ranging from supply chain optimization to product development. But just like the Internet (and The dot-com bubble which followed), not every company looking to take advantage of the AI opportunity will stand the test of time.
To reduce risk, it makes sense for investors to bet on companies that point to the gold rush. In other words, providing the infrastructure and support that other companies need to build their more consumer-facing applications.
Currently, chipmaker Nvidia controls more than 80% of the market for AI-enabled chips. However, this dynamic is amenable to disruption as it poses challenges in supply and pricing. According to VentureBeat, the Nvidia graphics processing unit (GPU) shortage is the “top gossip” in Silicon Valley as it drives up development costs and delays companies’ product launches. For advanced microdevices, this challenge is an epic opportunity.
AMD is investing in its AI-enabled hardware
According to CEO Lisa Su, AMD sees AI as its biggest and most strategic long-term growth opportunity. And in June, the company revealed its most advanced AI chip, the M1300x “accelerator,” which can use up to 192 GB of memory — compared to Nvidia’s leading AI chip, the H100, which only supports 120 GB. AMD will begin limited sales this year, with distribution ramping up in 2024.
Much remains unknown about the M1300x (such as its price and specific details about performance). But in the consumer GPU market, AMD’s strategy often involves undercutting Nvidia.
Instead of offering the most powerful hardware, AMD focuses on delivering value for money. The company can apply a similar strategy to gain market share in AI chips. Either way, management is confident — it estimates the market for its accelerators could grow from $30 billion to $150 billion by 2027, a compound annual growth rate (CAGR) of 50%.
AMD’s valuation is much lower than Nvidia’s
Perhaps the most compelling reason to buy AMD over Nvidia is valuation. While both companies have performed well in 2023 (up 66% and 218%, respectively), Nvidia’s rally has taken it into nosebleed territory.
With a price-to-sales (P/S) multiple of 36, Nvidia’s stock trades at over 14 times S&P 500 An average of 2.5 and four times higher than AMD’s P/S of just 8. And while Nvidia may gain the most from AI, AMD offers investors a more value-focused way to bet on the opportunity.
Will Ebifung does not have a position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. Motley Fool has a disclosure policy.