/shutterstock_611605280.jpg)
Artificial intelligence (AI) is a rapidly growing segment offering massive market opportunities. Many industries - including automotive, healthcare, finance, and more - are increasingly adopting AI solutions to enhance their operations. This growing demand for AI technology can benefit companies that develop AI-related products and services.
Investors should note that this transformative technology is in its early stages, and has a significant runway for growth as it becomes more integral to various aspects of business and daily life. Given its potential to reshape multiple industries, investing in AI-related stocks presents an enticing opportunity to generate market-beating returns in the long run.
From this perspective, Nvidia (NVDA) and Advanced Micro Devices (AMD) are two stocks at the forefront of this technological revolution. Let’s examine the factors to understand why these companies are particularly well-positioned to capitalize on the thriving AI industry.
Nvidia
Nvidia plays a pivotal role in driving the shift toward AI. The company’s cutting-edge graphics processing units (GPUs) are the driving force behind generative AI and large language models. This has significantly benefited the company and its stock price.
For example, Nvidia’s revenues more than doubled in the second quarter (Q2) of the current fiscal year, reflecting solid demand for its AI solutions. Further, its stock has gained over 200% year-to-date.
Notably, its Data Center compute revenue is growing remarkably fast, driven primarily by the acceleration in demand from the cloud service providers and large consumer Internet companies for its HGX platform, its AI supercomputing platform.
The momentum in Nvidia's business will likely sustain, propelled by the robust demand for AI solutions. The major cloud service providers are bolstering their data center infrastructures, ensuring a sustained high demand for Nvidia's products. Additionally, consumer internet companies are making significant investments in AI-centric data center infrastructure, which bodes well for growth.
Further, management pointed out that the demand for its AI-focused Data Center platform remains exceptionally strong and spans across various industries, providing multi-year growth opportunities for the company.
Considering the robust demand landscape, most analysts covering Nvidia stock are bullish about its prospects. Among the 35 analysts covering NVDA, 31 recommend a "Strong Buy," three analysts suggest a "Moderate Buy," and one maintains a "Hold" rating. The average 12-month price target for Nvidia stock is $625.68, implying expected upside of about 43% from current levels.
Advanced Micro Devices
Like Nvidia, Advanced Micro Devices stands in a favorable position to capitalize on AI's rapid adoption and deployment. During the Q2 conference call, AMD's management emphasized that AI presents a multibillion-dollar growth opportunity for the company, with scope across diverse sectors, such as cloud and edge computing.
Additionally, AMD noted that the engagements with top cloud providers, big enterprises, and numerous leading AI startups expanded significantly, which bodes well for future growth.
For example, within the Data Center division alone, AMD anticipates that the AI accelerator market will exceed $150 billion by 2027. Consequently, the company has increased its investments in AI-related research and development and its go-to-market approach to capture a substantial portion of this growing segment.
The company has been investing in MI250 and MI300 accelerators to tap the AI demand. Further, it is advancing well on both the hardware and software side. The company expects its growth to accelerate in the second half of the year. Additionally, it plans to launch its Instinct MI300 accelerators in the fourth quarter and anticipates substantial growth opportunities emerging from AI in 2024.
While AI presents significant growth opportunities, AMD is also expected to benefit from the recovery in the PC market. Speaking at the Deutsche Bank 2023 Technology Conference, CFO Jean Hu said, “the whole PC industry has gone through [...] probably the worst down cycle during the last three decades.” She added, “I think fundamentally, when we get through this down cycle, we do see some of the potential tailwinds on the Windows 10 and also the AI capabilities everybody is driving.”
Given the AI opportunity and anticipated recovery in the PC market, most analysts covering AMD remain bullish. Of the 28 analysts covering AMD, 21 recommend a “Strong Buy,” one analyst has a “Moderate Buy” rating, and six maintain a “Hold.” Further, the average price target for AMD is $141.03, implying an expected upside of about 38% from current levels.
