Tuesday, April 23, 2024
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Nvidia  (NVDA) – The company’s shares have surged over 200% this year because skyrocketing AI investments are forcing cloud network providers to invest heavily in the infrastructure necessary to train and operate AI applications. Nvidia’s H100 graphics chips are ideally suited to the task; for now, they’re essentially the only game in town. Traditional CPUs aren’t up to the task, but Nvidia won’t have this market all to itself forever. Competitor Advanced Micro Devices  (AMD) – may be nipping at its heels for market share as early as 2024.

An AI investment boom fuels Nvidia’s surging sales

The potential to reshape how we analyze and use data isn’t lost on corporate America. Businesses across finance, transportation, and healthcare are considering how AI applications may be used to improve their businesses, solidify share, or enter new markets.

The embrace of AI is reminiscent of the flurry of activity in the 1990s when the Internet went mainstream. Like back then, the rush is taxing existing technology infrastructure, resulting in orders for new equipment that can more quickly and efficiently process the mountains of data AI requires.

So far, Nvidia is the prime beneficiary of this shift in IT priorities. In May, Nvidia shocked the investing world by reporting that fiscal second-quarter earnings would be $11 billion, miles above the $7 billion Wall Street expected. It followed that impressive news earlier this month by reporting quarterly sales were $13.5 billion.

Moreover, it upped the ante for the third quarter. Analysts had already ratcheted higher their full-year outlooks following the earnings stunner in May. They didn’t expect just how good business had gotten, though. Nvidia says it will deliver $16 billion in revenue in Q3, again, much higher than analysts $12.5 billion target.

A new competitor is on the horizon

Nvidia’s shares have responded to the jump in demand, rising significantly this year. However, investors should remember that Nvidia isn’t the only game in town regarding GPUs. For example, it’s been competing with AMD for over a decade.

This summer, AMD’s CEO, Lisu Su, announced the company is up for the challenge of competing against Nvidia for AI chip market share. AMD is knee-deep in developing its own GPU and software that’s optimized for AI training and operation, and it hopes to begin commercial production of these chips by year’s end.

Nvidia undeniably is in the lead, but enterprises, governments, and cloud hyper scalers like Microsoft and Alphabet will likely be unwilling to hitch their wagon to just one supplier. If AMD can deliver a solution that’s even remotely close to the performance of Nvidia’s H100 chip, it’s likely to win its fair share of business.

That could be more needle-moving for AMD’s shares than investors anticipate. While Nvidia’s shares have rocketed higher this summer, AMD’s shares have retreated, making it a potential AI bargain. Currently, AMD trades at 48 times the expected 2023 earnings per share. That’s pricey, but Wall Street predicts earnings will swell by over 60% next year to $3.53 per share, resulting in a forward P/E ratio below 30.

Earnings estimates could prove too timid if AMD can deliver its chips on schedule. The market opportunity is massive, and upside revisions could mean AMD’s shares are an even bigger bargain than they appear now.

Last quarter, Lisu Su put the opportunity in perspective, saying that customer interest in the MI 250 and MI 300 is “very high,” and AI engagements increased by 7x from the previous quarter. There should be plenty of money to go around in this space. J.P. Morgan analyst Harlan Sur estimates the AI market opportunity to be $150 billion.  “Longer-term, it is clear that AI represents a multi-billion-dollar opportunity for AMD,” said Su on AMD’s quarterly conference call.


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