All eyes have been on chip stocks amid a boom in artificial intelligence (AI), where companies are developing the hardware for training AI models and completing intensive tasks. One standout in this sector is Advanced Micro Devices (NASDAQ: AMD), holding the second-largest market share in GPUs capable of handling rigorous activities like gaming, AI, and cryptocurrency mining.
Analysts have long compared AMD to the industry giant Nvidia, questioning its potential for matching the growth trajectory of its competitor. Nvidia’s stock has surged by 209% in the past year, backed by robust earnings, solidifying its dominance in the AI chip sector. In contrast, AMD’s stock, reflecting its early stages in the AI realm, has risen by 28% in the same period.
Initially riding the wave of optimism that it would emulate Nvidia’s success, AMD saw a significant uptick in its stock. However, recent months have been less kind, with the stock dipping by about 16% due to waning excitement over the company’s future prospects.
Challenges amid Increasing Competition
In its earnings report for the first quarter of 2024, AMD exceeded analysts’ expectations, posting adjusted earnings per share of $0.62 and revenue of $5.5 billion, up 2% year over year. While the results were positive, they failed to spark much investor enthusiasm, with AMD’s stock seeing only a marginal increase post-earnings.
The company’s struggle against comparisons to Nvidia was evident in the quarter, with Nvidia’s revenue surging by 262% and surpassing Wall Street estimates by over $1 billion.
While AMD’s data center and client segments saw revenue growth of over 80% in Q1 2024, its gaming and embedded divisions experienced revenue declines of 48% and 46%, respectively, highlighting areas needing improvement.
Attempting to challenge Nvidia’s dominant position in AI GPUs poses a significant hurdle for AMD. Nevertheless, the company remains committed, unveiling new AI chips and transitioning to an annual release cycle for chip designs to enhance competitiveness.
Comparing AMD with Its Peers: Nvidia and Intel
Although AMD has delivered remarkable returns of over 3,600% in the past decade, the evolving market dynamics make stock selection in 2024 a challenging task when pitted against competitors.
Nvidia’s supremacy in the AI chip space, coupled with the soaring demand for GPUs, positions its stock as a reliable investment choice. On the other hand, Intel, a rising adversary to AMD, is expanding its chip manufacturing capabilities, potentially capitalizing on the escalating demand for AI chips.
In contrast, AMD finds itself somewhat adrift compared to its rivals, lacking a distinctive niche in AI where it can dominate. While the company boasts strengths in areas like gaming, data centers, PCs, and consumer products, recent earnings performance has failed to inspire immediate confidence.
Furthermore, a steep 37% decline in AMD’s free cash flow over the past year signals potential challenges in bolstering its business in the near term.
The P/E ratio comparison reveals that Nvidia and Intel stocks offer better value propositions compared to AMD, with lower valuations denoting stronger investment potential. Despite limited growth this year, AMD’s stock appears relatively overpriced.
Historical trends in the tech sector suggest that while long-term investment in AMD remains viable, other alternatives may provide more reliability and value in the current scenario.
Deciding on Investing in Advanced Micro Devices
Before considering investing in AMD, it is prudent to explore other options as well.
Notably, the Motley Fool Stock Advisor team, in naming the 10 best stocks for investors to buy, excluded Advanced Micro Devices from their selection. This indicates the potential for significant returns in the future from the chosen stocks.
Reflecting on history, when Nvidia entered this esteemed list back in 2005, an investment of $1,000 could have resulted in over $800,000 by now. This showcases the tremendous growth potential that handpicked stocks can offer over time.
The Stock Advisor service provides a curated roadmap to success for investors, offering portfolio-building guidance, regular analyst updates, and two new stock picks monthly. Since 2002, Stock Advisor has outperformed the S&P 500 by more than fourfold, pointing to its track record of delivering superior returns.
With these considerations in mind, investors seeking to navigate the complexities of the chip sector should weigh their options carefully to maximize investment potential.