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The rapid adoption of artificial intelligence (AI) technologies has gained significant momentum since the start of 2023. The mainstream launch of ChatGPT in late 2022 captured the imagination of investors and consumers globally, highlighting the massive potential of generative AI technologies.
Several companies are investing heavily to gain an edge in the AI race, a market that industry estimates predict could grow to nearly $2 trillion by the end of the current decade. The explosion of AI-based platforms has increased the demand for the high-end semiconductor chips, such as graphics processing units (GPUs), required to power these technologies. As a result, chip stocks such as Nvidia (NVDA) and Advanced Micro Devices (AMD) are now top investment options.
Nvidia currently leads the AI chip market with a market share of roughly 90%, allowing the tech stock to gain over 650% in the last two years.
Comparatively, AMD stock has returned 67.5% in this same period. Let’s see which AI-based chip stock is a better buy at current prices.
AMD Acquires ZT Systems for $4.9 Billion
Last week, Advanced Micro Devices announced plans to acquire ZT Systems, a server company, for $4.9 billion to expand its portfolio of AI chips. AMD will fund the acquisition with 75% in cash and the rest in stock. The company ended Q2 with $5.34 billion in cash and can easily complete the acquisition without raising additional capital.
AI companies require significant computing power to train and operate their robust platforms, increasing demand for robust server systems. The acquisition will allow AMD to accelerate the roll-out of its GPUs at scale, meet demand from tech giants including Microsoft (MSFT), and contribute to its top line.
ZT Systems generates annual sales of $10 billion, and the deal is expected to close in the first half of 2025.
According to consensus estimates, AMD is forecast to increase sales by 1.2% to $22.95 billion in 2024 and by 28.4% to $29.5 billion in 2025. Valued at 49.7 times forward earnings, AMD stock is quite expensive.
Out of the 36 analysts covering AMD stock, 29 recommend “strong buy,” one recommends “moderate buy,” and six recommend “hold.”
The average target price for AMD stock is $192.88, indicating an upside potential of almost 24.5% from current levels.
Is Nvidia Stock Overvalued?
Nvidia was briefly the largest company in terms of market cap earlier this summer, due to its astonishing rise in share prices. In recent months, there has been a ton of excitement around the launch of Nvidia’s Blackwell chips, as companies such as Meta (META), Alphabet (GOOG) (GOOGL), and Microsoft have placed sizeable orders worth billions of dollars for these products. However, a reported design flaw has delayed the shipment of these chips, dragging Nvidia’s share price lower.
Compared to AMD, Nvidia is growing at a much faster pace. Strong demand for GPUs has allowed Nvidia to increase revenue by 93% and operating income by 150% in the last 12 months. Moreover, its earnings growth has allowed Nvidia to increase free cash flow by 147% in this period.
Wall Street expects Nvidia to grow sales from $55.7 billion in fiscal 2024 (ended in January) to $150.6 billion in fiscal 2026. Its adjusted earnings are forecast to expand from $1.19 per share to $3.40 per share in this period.
Out of the 39 analysts covering NVDA stock, 34 recommend “strong buy,” two recommend “moderate buy,” and three recommend “hold.” The average target price for NVDA stock is $141.65, indicating an upside potential of 9.5% from current levels.
The Takeaway
Analysts expect Nvidia to generate close to $106 billion from data center sales this year, while AMD’s AI chip sales forecast is much lower, at $4.5 billion. Both Nvidia and AMD trade at a discount to consensus price target estimates. But if you have to choose just one stock, I would put my money on Nvidia, due to its leadership position in the GPU market, higher growth rates, and lower valuation.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
