Advanced Micro Devices (AMD) has witnessed a remarkable surge of over 130% in its share price over the past year, primarily driven by the flourishing artificial intelligence (AI) sector. The unveiling of OpenAI’s ChatGPT in November 2022 sent numerous chip stocks soaring and ignited a bullish fervor on Wall Street, especially surrounding companies involved in developing the hardware required for running and training AI models.
Despite securing the second-largest market share in graphics processing units (GPUs) and gearing up to ship a new AI chip this year, AMD faces the challenge of translating its heavy investment in the market into substantial earnings. The stock’s forward price-to-earnings ratio (P/E) has surged by 58% since January last year, reaching a hefty 45. Moreover, its free cash flow has plummeted by 47% to slightly over $1 billion during the same period. Consequently, while AMD holds significant long-term potential in the industry, its current valuation and financial status suggest that alternative AI stocks may offer superior value and stability.
1. Microsoft: A Dominant Force in AI
Microsoft swiftly emerged as a formidable player in the AI landscape, particularly following substantial investments in OpenAI, providing it access to some of the start-up’s most advanced AI models. Leveraging OpenAI’s technology, the software giant seamlessly integrated AI features across its product spectrum.
In 2023, Microsoft bolstered its cloud platform, Azure, with new AI tools, embedded aspects of ChatGPT into its Bing search engine, and enhanced productivity in its Office suite through AI. Expanding its AI offerings, the company introduced Copilot, an AI assistant available as a $30 per month add-on to its Microsoft 365 subscription service, showcasing the potential for significant earnings enhancement.
The surge in Microsoft’s stock price by 64% over the past year, inclusive of an 8% rise since the commencement of 2024, propelled it to surpass Apple’s market cap and secure the position of the world’s most valuable company. With over $62 billion in free cash flow in 2023, Microsoft stands capable of continuing its AI investments and maintaining its competitive edge. Moreover, sporting a considerably lower forward P/E than AMD, Microsoft emerges as a compelling choice for AI investment in 2024.
2. Intel: Shifting Strategies and AI Prospects
Intel witnessed a nearly 13% decline in its share price since releasing its fourth-quarter 2023 earnings, where revenue grew by 10% year over year, surpassing Wall Street estimates by $230 million. However, weaker guidance overshadowed these gains, with Intel projecting Q1 2024 earnings of $0.13 per share, considerably below analysts’ forecast of $0.42 per share, alongside revenue expectations falling short of Wall Street estimates.
The surge in AI has led to a transformation in the chip market, with increasing GPU demand for server applications as CPU demand wanes. Having dominated the CPU market for years, Intel’s weak guidance reflects this market shift.
Despite its recent challenges, Intel’s strategic investments in generative technology position it as a compelling long-term play. The introduction of a range of AI chips, including Gaudi3, a GPU engineered to rival similar offerings from Nvidia and AMD, underscores its commitment to AI expansion. Additionally, envisioning major gains over the long term, Intel presents itself as a promising value play compared to AMD, among other AI stocks in 2024.
For investors looking for the next opportunity, the compelling case for Microsoft and Intel in the AI sector, underscored by their strength and potential, is more than obvious.