Regarding the artificial intelligence (AI) chip market, NVIDIA Apparently, the GPU maker is monopolizing nearly all of the oxygen in the room, as investors push its stock price into the stratosphere with what appears to be a years-long lead in AI chip technology.
but, Advanced Micro Devices (NASDAQ: AMD) NVIDIA has a reputation for developing its own AI chips and challenging seemingly insurmountable technological advantages. Could Nvidia's struggles to meet demand present an opportunity for AMD?
AMD struggles
At first glance, AMD doesn't seem likely to be able to challenge Nvidia's dominance. The company released its AMD Instinct MI300 AI chip last year, claiming that its chip outperformed Nvidia's Grace Hopper architecture in some respects. Nvidia responded by releasing previews of its much faster Blackwell and Rubin chips, due for release in 2026.
Additionally, Nvidia impressed investors with a 262% increase in annualized revenue in the most recent quarter, and has maintained triple-digit revenue growth for several quarters now.
In contrast, AMD has suffered declining revenue in recent quarters due to challenges in the gaming and embedded segments. The company's financial position has improved thanks to an 80% increase in annual revenue from its data center division, which includes AI chips. Still, overall revenue is only up 2% annually, which is hardly an impressive figure for investors.
For AMD
But as mentioned above, AMD has a history of quickly closing technological leads. After decades of lagging behind, Intel In the CPU market, they started designing chips that outperformed their long-time rivals.
And independent assessments suggest that AMD is outperforming Nvidia in some niches of the GPU market. While Nvidia remains the clear leader in the AI chip market, innovations like this are good reason to wait for AMD's chip releases before drawing any conclusions about the magnitude of Nvidia's technological advantage.
Additionally, AMD's earnings release contained something that some investors may have overlooked: The data center division accounted for 43% of AMD's revenue in the quarter, up from 24% in the year-ago period.
This percentage is important because in NVIDIA's fiscal 2023 Q1 (ending May 1, 2022), data center revenues made up 45% of the company's revenues. Just two years later, in fiscal 2025 Q1 (ending April 30), the data center segment has grown to 87% of total revenues. This shows the path AMD could follow. If AMD's next product release significantly closes the technology gap, AMD's growth should accelerate.
Another factor to consider is valuation. Nvidia's P/E of 71x is much lower than AMD's 245x earnings, but looking beyond the P/E ratio, AMD's stock may look attractive. In terms of price-to-sales (P/S) ratio, AMD's 12x is much lower than Nvidia's P/S ratio of 38x. Also, Nvidia's stock has risen to 61x book value, which is an exorbitant valuation compared to AMD's price-to-book ratio of just 5x.
So, taking both technology and valuation into account could change the investment thesis: If AMD's AI chips are roughly as attractive as Nvidia's chips and the stock sells for less than one-tenth of its book value, investors might turn to AMD stock.
The case for investing in AMD
Ultimately, AMD is unlikely to displace Nvidia in the AI chip market anytime soon, but its chances of challenging Nvidia's dominance may be greater than investors expect.
To be sure, Nvidia has been successful in establishing itself as the must-have AI chip company in the minds of investors, making AMD and its peers obsolete, but AMD has a history of catching up to and sometimes surpassing competitors, and investors shouldn't discount the possibility that AMD could close the gap in the AI chip race.
With data center growth approaching triple digits and a price-to-book multiple less than one-tenth that of Nvidia, AMD's stock could soar if AI chip sales remain strong.
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Will Healy has investments in Advanced Micro Devices and Intel. The Motley Fool has investments in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: buy January 2025 $45 calls on Intel and sell August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Can This Veteran Tech Company Overtake Nvidia in Artificial Intelligence (AI) Dominance? was originally published by The Motley Fool.
