Nvidia(NASDAQ: NVDA) reigns as the reigning king of artificial intelligence (AI) semiconductor hardware. Holding a market share as high as 90% in 2023, Nvidia set the industry standard with its H100 and upcoming H200 data-center graphics chips (GPUs).

However, Advanced Micro Devices (NASDAQ: AMD) has emerged as a formidable opponent. The company’s new MI300 series offers AI data center chips and is now in high demand among major technology companies and leading AI developers.

The expansion of AI goes beyond the data center, and AMD has positioned itself with a fresh lineup of AI chips for personal computers and devices, aiming to bring AI to the masses.

The Expanding Reach of AI, Courtesy of AMD

AMD has recently disclosed its financial data for the fourth quarter and full-year 2023, emphasizing its range of AI products. Of particular interest to investors is the MI300, AMD’s bid to capture data-center market share from Nvidia.

The MI300 comes in two configurations: the MI300X, a pure GPU, and the MI300A, which combines GPU and central processing unit (CPU) chips to fashion the world’s first accelerated processing unit (APU) for data centers.

The MI300A is the centerpiece of the new El Capitan supercomputer at the Lawrence Livermore National Laboratory, set to be the world’s fastest upon its launch later this year. In the fourth quarter, AMD shipped most of the MI300A chips for El Capitan, with the remainder scheduled for dispatch in the current quarter.

The MI300 has drawn attention from a host of high-profile clients, not only for its performance but also as data center operators seek to diversify their infrastructure amid Nvidia’s ongoing supply constraints. Notable tech leaders such as Microsoft, Oracle, and Meta Platforms have joined the ranks of AMD’s MI300 customers.

While AMD is in Nvidia’s shadow in the data center segment, it dominates with a 90% market share in AI-enabled personal computers. Its Ryzen 7000 series (Ryzen AI) CPUs are crafted to manage AI workloads on-device, promising a faster, more seamless experience without relying on an external data center.

Millions of personal computers have already shipped with Ryzen AI chips, and AMD is preparing to launch a new processor that may boost speeds by more than threefold, further solidifying its position in this market.

AI’s Projected Impact on AMD’s Revenue Growth

AMD’s most recent financial report, covering the fourth quarter of 2023, presented a mixed picture. The company recorded a fourth-quarter revenue of $6.17 billion, exceeding expectations. However, its projection of $5.4 billion in revenue for the upcoming first quarter of 2024 fell short of Wall Street’s expected $5.7 billion, leading to a 7% drop in AMD’s stock following the report.

Nonetheless, the fourth quarter unveiled significant growth in AMD’s core segments. Its data center revenue hit a record-high $2.3 billion, signifying a 38% year-over-year increase. This acceleration was partly driven by robust demand for data center GPUs, heavily influenced by AI.

More promising news followed, as AMD revised its forecast for the new MI300 series GPUs contribution to total data center revenue in 2024 from $2 billion to $3.5 billion. The substantial revision was underpinned by a strong customer base and expanding engagements, reflective of the soaring demand for AI processing power.

Furthermore, AMD’s Client segment, home to the Ryzen AI series of chips, saw revenue of $1.5 billion, marking a 62% year-over-year increase. The company anticipates sustained strength in this segment following the launch of its next generation of hardware later this year.

AI has served as a buffer against weaknesses in other areas of AMD’s business. Notably, a decline was observed in its gaming revenue during the fourth quarter, a consequence of the reduced sales momentum for flagship consoles like Sony’s PlayStation 5.

Image source: Getty Images.

The Case for Investing in AMD Stock, Despite Current Valuation Concerns

In 2022, AMD went through a challenging period as inflation and soaring interest rates dampened consumer demand for big-ticket electronics. This created a supply glut in the chip sector, echoing into 2023 and significantly impacting AMD’s bottom line.

Adjusted earnings per share for the year amounted to $2.65, reflecting a 24% decline compared to 2022. As a result, AMD’s stock now bears a price-to-earnings (P/E) ratio of 63.3.

Comparatively, the iShares Semiconductor ETF trades at a P/E of only 31.9, rendering AMD stock nearly twice as expensive as its industry peers.

However, the consensus estimate put forth by Wall Street indicates that AMD will rebound in 2024, delivering $3.67 in earnings per share, thereby reducing its P/E to 45.5. Looking ahead to 2025, AMD could yield $5.50 in earnings, further lowering its P/E to just 30.3 (assuming constant stock price). These projections, if fulfilled, would paint a more favorable picture for AMD’s valuation.