In 2023, the semiconductor industry witnessed notable achievements, primarily fueled by a surging demand for high-performance chips spurred on by the continuous expansion of artificial intelligence (AI).
Central to this upswing are graphics processing units (GPUs), serving as the backbone for extensive computer systems processing data for advanced AI services like OpenAI‘s ChatGPT and Google Bard.
Unlike traditional central processing units, GPUs are specifically designed for the intricate mathematical computations inherent in AI, underscoring their unmatched efficiency in propelling the dynamic realm of AI-driven technologies.
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An argument for Nvidia
Nvidia (NASDAQ: NVDA) has swiftly dominated most of the market for chips utilized in training AI models, with estimates suggesting its control surpasses 90% in the AI training sector. The extensive deployment of Nvidia’s A100 data center GPUs, numbering in the thousands, was crucial in training the widely-used chatbot ChatGPT last year.
Presently, the demand for Nvidia’s latest flagship, the H100 data center GPU, is exceptionally high, to the extent that their foundry partner Taiwan Semiconductor Manufacturing, commonly known as TSMC, is grappling with challenges in meeting the demand for these chips.
Frequently, emerging competitors tend to be more cost-effective than the dominant players in the industry. However, in this instance, Nvidia is not only the industry leader but is also more attractively valued than AMD.
Currently, AMD stock is traded at a forward price-to-earnings multiple of 36, while Nvidia’s shares are valued much more reasonably at 23.6 times forward earnings.
The situation becomes even more favorable when considering projected growth. AMD’s price-to-earnings-to-growth (PEG) ratio stands at 1.9, whereas Nvidia’s is inexpensive at 0.47.
An argument for AMD
A strong argument can be made that Advanced Micro Devices, Inc. (NASDAQ: AMD) might be a more attractive AI stock than Nvidia in the increasing demand for an alternative to Nvidia’s GPUs. This situation presents a significant opportunity for AMD to make a substantial impact.
Recent developments support this notion. Both Meta Platforms (NASDAQ: META) and Microsoft (NASDAQ: MSFT) have expressed intentions to incorporate AMD’s new Instinct MI300X AI chip, indicating a deliberate move by major tech players to diversify beyond exclusive reliance on Nvidia.
If AMD can provide a compelling and cost-effective substitute for Nvidia, the company could witness more substantial growth potential than Nvidia. This, in turn, might contribute to its stock outperforming Nvidia, as has been the case over the past three months.
Moreover, there’s a noteworthy advantage in favor of AMD: the diversification it brings to the table. AMD produces a wide variety of chips serving a broad spectrum of applications. In the event of turbulence in the AI market, AMD might navigate the volatility more resilient than Nvidia.
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Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
