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The battle for AI chip supremacy is heating up, and while Nvidia continues to dominate, AMD is making strategic moves to gain ground. Nvidia (NVDA), the current market leader, recently reported impressive Q2 earnings, solidifying its position as the go-to provider for artificial intelligence (AI) processors. The company’s recent Q2 earnings blew past expectations, with revenue soaring 122% year-over-year to $30 billion, driven by strong demand for its AI chips.
However, as the AI chip market expands — projected to top $90 billion in 2025 — competitors like Advanced Micro Devices (AMD) are not content with sitting on the sidelines, and have been making strategic moves to challenge Nvidia's dominance.
AMD's recent $4.9 billion acquisition of ZT Systems, a leading AI and high-performance computing system provider, signals its intent to challenge Nvidia's supremacy in the AI space. This bold move comes at a time when the overall data-center AI chip market, valued at $17.7 billion in 2023, sees Nvidia commanding a market share estimated between 65% and 95%.
As investors digest these developments, the question arises: Is rival AMD stock a buy in the aftermath of Nvidia's earnings? AMD stock has gained ground since its Q2 2024 earnings release on July 30, but still has plenty of room to close a significant performance gap with NVDA, which has more than doubled YTD. Let's explore AMD's potential and determine if it's a smart buy in the wake of Nvidia's Q2 earnings report.
AMD Stock Underperforms
Valued at $235 billion, Advanced Micro Devices (AMD) operates with a fabless business model, focusing on designing and selling cutting-edge semiconductor products like microprocessors and graphics processors. This approach allows AMD to channel more resources into research and development, maintaining its competitive edge in the tech industry.
AMD's stock performance has been mixed over the past year. AMD is up by a robust 37.6% over the past 52 weeks, outperforming the broader S&P 500 Index ($SPX). However, the YTD performance for 2024 has been less impressive, with the stock down just over 1% - largely due to a sharp 36% decline off its early March highs.
Despite the underwhelming stock performance in 2024, AMD's latest financial results show signs of improvement. In its second-quarter earnings report, AMD reported revenue of $5.8 billion, with a gross margin of 49% and net income of $265 million. On a non-GAAP basis, the gross margin was 53%, and net income was $1.1 billion, or $0.69 per share.
This growth was primarily driven by the company's Data Center segment, which achieved record revenue of $2.8 billion, a remarkable 115% year-over-year increase. The surge in Data Center revenue can be attributed to the strong demand for AMD's Instinct GPUs and 4th Gen EPYC CPUs, signaling the company's growing presence in the AI chip market.
AMD's valuation remains a point of contention. The stock's forward adjusted price-to-earnings (P/E) ratio is relatively high at 43.04, compared to the sector median of 23.77, suggesting that much of the company's future growth potential is already priced into AMD shares at current levels.
However, while AMD's valuation appears expensive based on traditional metrics, the company's growth prospects in the expanding AI market might justify the premium. In fact, its adjusted price/earnings-to-growth (PEG) ratio of 1.00 compares favorably to Nvidia's, at 1.13.
AMD's AI Ambitions and Strategic Moves
AMD's journey into the AI chip market has been marked by bold ambitions and strategic acquisitions, positioning the company as a formidable challenger to Nvidia's dominance. Recently, AMD announced its acquisition of ZT Systems for $4.9 billion, a move aimed at bolstering its AI infrastructure capabilities. ZT Systems is renowned for providing AI infrastructure to major hyperscale computing firms. This acquisition is a significant leap in AMD's strategy to deliver top-tier AI training and inferencing solutions, enhancing its competitive position against industry giants like Nvidia.
In addition to ZT Systems, AMD completed its acquisition of Silo AI, the largest private AI lab in Europe, for approximately $665 million. This acquisition brings a team of world-class AI scientists and engineers to AMD, furthering its commitment to developing end-to-end AI solutions. Silo AI's expertise in creating cutting-edge AI models and platforms is expected to accelerate AMD's innovation in the AI space.
These strategic moves not only enhance AMD's technological capabilities but also signal to investors that the company is serious about capturing a larger share of the AI market. As AMD strengthens its AI portfolio, these acquisitions could potentially drive stock performance, attracting more investor interest and setting the stage for future growth.
Analysts Say AMD is a Strong Buy
AMD's trajectory is looking promising, as the company forecasts third-quarter revenue of approximately $6.7 billion, which suggests year-over-year growth of about 16% and a sequential increase of around 15%. This optimistic outlook is driven by AMD's strategic focus on AI chip revenue, which is expected to contribute significantly to its financial performance. The anticipated non-GAAP gross margin of about 53.5% further underscores the company's confidence in maintaining strong profitability.
Analysts are quite bullish on AMD's prospects, based on the consensus “strong buy" opinion. Out of 36 analysts in coverage, no fewer than 29 recommend a “strong buy,” while one suggests a “moderate buy,” and six advise a “hold.”
AMD recently added a new bull to its ranks when Edward Jones started coverage with a “buy” rating, citing “growing demand for data center infrastructure” as a key growth catalyst for the company.
The average price target for AMD is $192.88, representing a potential upside of approximately 31.6% from current prices.
Final Verdict: Is AMD the Next Big Buy in the AI Chip Race?
While Nvidia's dominance is undeniable, AMD's strategic moves and growing AI capabilities make it an intriguing underdog. The company's recent acquisitions, coupled with its strong financial outlook and overwhelmingly positive analyst sentiment, suggest there's serious potential for growth. For investors seeking (relatively) reasonable valuations in the AI chip space with significant upside potential, AMD should be a strong contender.
On the date of publication, Ebube Jones 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.
