Advanced Micro Devices could disrupt Nvidia's dominance in the market for data center chips.
Nvidia is the leading supplier of graphics processing units (GPUs) for data centers, which are used to develop artificial intelligence (AI) models. At the time of this writing, its stock has soared 187% year to date, because the company is delivering incredible revenue growth as chip demand continues to outstrip supply.
But Nvidia CEO Jensen Huang believes data center operators will spend $1 trillion upgrading their infrastructure to meet the needs of AI developers over the next four years, so this opportunity is big enough to support several GPU suppliers. Advanced Micro Devices (AMD 1.42%) recently launched a series of AI GPUs of its own, and the company has already won some of Nvidia's biggest customers.
Here's why AMD stock might be a great buy in the new year, even for investors who already own Nvidia.
Nvidia had an estimated 98% share in the market for data center GPUs during 2023, because there was practically no competition for its flagship H100 chip. However, AMD launched its MI300X GPU in December, and it quickly attracted many of Nvidia's top customers like Microsoft, Meta Platforms, and Oracle.
According to AMD, many of those data center operators are yielding better performance and a lower cost of ownership by using the MI300X versus the H100, which bodes well for AMD's attempt to capture market share. However, Nvidia isn't standing still -- its H200 is already in the market, which is twice as powerful as its H100, and it just started shipping its new Blackwell GPUs.
The Blackwell-based GB200 NVL72 system can perform AI inference at 30 times the speed of the equivalent H100 system, so AMD has a big mountain to climb in order to catch up. The company just started shipping its MI325X to customers, which offers 20% better inference performance than the H200, which is a good start.
But investors have already turned their attention to AMD's MI350 series, which should reach customers in the second half of 2025. It uses the company's new CDNA (Compute DNA) 4 architecture, which delivers a performance boost of 35 times compared to CDNA 3 chips like the MI300. In other words, it's going to be a formidable competitor for Nvidia's Blackwell chips, even though it's launching more than six months later.
AI developers typically pay for computing capacity by the minute, so faster chips can translate into substantial cost savings. Therefore, performance can determine which chip giant wins market share, and that's why Nvidia and AMD are fighting so hard to launch faster chips every six to 12 months.
Data centers will always play a key role in training AI models and supporting AI inference, but the chips inside smartphones and computers are becoming powerful enough to run some AI workloads on-device. That creates a faster user experience because chatbot queries, for example, don't have to travel to the data center before a response can be formulated.
AMD dominates the market for AI chips used in personal computers (PCs). Its Ryzen AI 300 Series delivers industry-leading performance across the GPU, central processor (CPU), and the new neural processor (NPU), which allows the user to effortlessly run AI chatbot applications.
In fact, the Ryzen AI 300 Series is three times more powerful when it comes to AI performance than AMD's previous generation of chips. They already power Microsoft's new Copilot+ PCs, and manufacturers like Lenovo and HP plan to triple the number of Ryzen AI devices they offer by the end of 2024. Next year, AMD expects there will be more than 100 computing platforms using those chips in commercial settings.
AMD generated a record $6.8 billion in total revenue during the third quarter of 2024 (ended Sept. 28), which was an 18% increase from the year-ago period. However, its AI-related segments delivered much faster growth.
The company's data center revenue soared 122% to a record $3.5 billion, led by GPU sales. AMD CEO Lisa Su now says GPU revenue alone could hit $5 billion in 2024, which is more than 150% higher than her original forecast of $2 billion coming into the year.
AMD's client segment revenue jumped 29% to $1.9 billion. It's home to the Ryzen AI chips, and considering Su believes the AI PC cycle is still in its infancy, investors should look for strong growth in this segment throughout 2025.
The reason AMD's total revenue growth wasn't higher than 18% is because the company's gaming segment saw a 69% decline in sales compared to the year-ago period. Demand is slowing for flagship consoles like Microsoft's Xbox and Sony's PlayStation 5, and PC gamers are eagerly awaiting a new generation of AMD GPUs that will ship in 2025.
The Wall Street Journal tracks 54 analysts covering AMD stock, and 37 have given it the highest-possible buy rating. Seven more are in the overweight (bullish) camp, and 10 recommend holding. No analysts recommend selling.
They have an average price target of $185.77 for the next 12 to 18 months, implying an upside of 31% from where the stock trades as of this writing. However, the Street-high target of $250 suggests AMD stock could soar by 76%.
According to Yahoo!, Wall Street's consensus forecast for 2025 suggests AMD's earnings per share (EPS) could soar 54% to $5.14, which places its stock at a forward price-to-earnings (P/E) ratio of 27.6. The stock would have to soar 71% next year just to trade in line with its current P/E ratio of 47.3 (based on the company's trailing-12-month EPS of $3), so the Street-high target might actually be realistic.
AMD's forward P/E is also much cheaper than Nvidia's forward P/E ratio of 31.3. Nvidia deserves a premium valuation because it's growing its revenue and earnings faster than AMD right now, plus it still has a clear lead in the data center GPU space.
However, Nvidia has so much market share that it's likely to only shrink from here, whereas AMD is only just starting to break into the segment, so its best growth might still be ahead. Moreover, as the leader in the chip segment for AI PCs, AMD has a front-row seat to what could be the next big growth catalyst for the AI industry.
Therefore, AMD stock could be a great buy for any investor as we enter 2025. But considering the company is a top candidate to take some of Nvidia's market share in the data center industry, investors who own Nvidia stock could hedge some of that risk by buying into AMD.