Nvidia (NVDA +4.30%) has had quite the rise thanks to its best-in-class data center graphics processing units (GPUs). But it's not the only company that offers these products. Advanced Micro Devices (AMD +13.85%) is another competitor in this space and has seen some success even if it's not nearly to the level that Nvidia has achieved.
So, is AMD the sleeping giant of artificial intelligence (AI) investing? Or are its current aspirations too much of a stretch?
AMD is still light-years behind Nvidia
One positive AMD has going for it compared to Nvidia is that it's a much broader company. Instead of focusing solely on GPUs and the other products that support their integration, AMD has other product lines, like CPUs for desktops, embedded processors, and other data center equipment. This helps protect AMD in a downturn.
On the other hand, it hurts when there is a boom in one particular industry like there is right now with data center GPUs. This difference can be seen in each company's data center revenue streams.
| Company | Q1 Data Center Revenue | Growth (YOY) | Growth (QOQ) |
|---|---|---|---|
| AMD | $2.3 billion | 80% | 2% |
| Nvidia | $22.6 billion | 427% | 23% |
Data sources: AMD and Nvidia. Note: AMD's Q1 ended March 31, and Nvidia's Q1 ended April 28. YOY = year over year. QOQ = quarter over quarter.
To be frank, AMD is getting demolished in the AI arms race by Nvidia. Whether it's from a raw revenue standpoint or growth, AMD's business looks minuscule compared to Nvidia's. However, that may be turning around.
Many of the largest purchasers of GPUs are cloud computing providers, which rent out computing power to clients that don't need an ultra-powerful computer at all times. These companies (like Microsoft) have recently purchased more AMD GPUs to avoid getting locked into one ecosystem.
NASDAQ: AMD
Key Data Points
However, with most customers clamoring for Nvidia GPUs due to their raw performance, AMD will maintain its position only as an alternative pick, not a first choice. This is the unfortunate situation AMD finds itself in, but it still could be a worthy investment if it could be picked up at a reasonable price.
AMD's stock is barely cheaper than Nvidia's
Pinpointing fantastic businesses is already difficult, but ensuring you don't overpay for a stock is also challenging. Fortunately for AMD, analyzing its stock valuation is quite easy.
I'll use AMD's forward price-to-earnings (P/E) ratio to value the stock, as the company is going through significant change due to the AI arms race, which renders the trailing P/E useless. I'll also compare it to Nvidia's valuation.
AMD PE Ratio (Forward) data by YCharts
Until recently, AMD was more expensive than Nvidia despite getting smoked in nearly all aspects. After Nvidia's latest run-up, that is no longer true.
However, investors would be silly to crown AMD as the superior investment to Nvidia based on a slightly cheaper P/E ratio. You must pay for quality businesses, but AMD's discount isn't enough to justify owning the stock. Although AMD is a sleeping giant in AI, it will likely stay sleeping because of Nvidia's outright dominance.
