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With a market share of 90% Nvidia (NASDAQ: NVDA) reigns as the undisputed king of the artificial intelligence (AI) chip market. But in an ironic twist, the company’s success has created favorable conditions for its rivals to take the AI titan a step further. Advanced micro devices (NASDAQ: AMD) realizes the opportunity that a supply-constrained Nvidia has presented and plans to use these fortuitous circumstances entirely to its advantage.
Why the Nvidia Spillover Effect Creates Unparalleled Opportunities for AMD
Nvidia’s unprecedented revenue growth, rising share price and resulting market capitalization have all demonstrated that the AI infrastructure market is sustainable and borderless. The high demand for Nvidia’s chips has dispelled any lingering doubts that AI mania is just another one dot.com bubble awaits erupt.
Graphics Processing Unit (GPU) chips are the lifeblood of generative AI systems. Semiconductor companies, such as AMD, provide the essential chip architecture capabilities needed to create and maintain such systems. Technology companies that build or design these indispensable components are currently the only companies that can turn the AI hype into a real revenue reality.
Hardware companies such as Dell And Lenovo, as well as cloud providers, immediately need AI chips at competitive prices to meet rising customer demand. They can’t secure Nvidia’s chips fast enough, which means they have to buy GPU hardware from other sources.
AMD realized the profit potential offered by the current supply-demand imbalance and quickly stepped into this supply gap. It has seized the opportunity by quickly ramping up production of its AI GPU series 1300 processors as an alternative to Nvidia’s offering for a technology sector hungry for data center chips.
AMD seems ready to increase its AI presence
Like other semiconductor companies, AMD has suffered from a chip glut over the past two years, which is only now beginning to disappear as tech companies reduce excess inventories. Poor performance in the company’s two non-data center segments resulted in tepid overall revenue growth of 2% year over year. The company’s gaming segment fell 48% year over year; the embedded segment, which serves processing needs for the industrial, automotive and testing industries, fell 46% year over year.
However, the most telling metric for establishing the company’s prospects is the astonishing growth of the company’s data center business. Revenues from this segment grew an astonishing 80% year-on-year to $2.3 billion. The customer segment, which provides CPUs for servers, laptops, mobile devices and desktop devices, rose 85% to $1.4 billion.
The accelerated growth of the data center and customer segments prompted the company to raise its full-year 2024 guidance from $3.5 billion to $4.0 billion. CEO Lisa Su stated that these estimates are realistic based on customer engagement.
Over time, revenue from AMD’s cloud GPU sales will easily exceed that of the two non-data center segments that have been dragging down overall revenue.
An attractive investment opportunity for long-term appreciation
Given flat year-over-year revenue growth, at 46 times earnings over the next twelve months, AMD’s current valuation seems on the high side. With a score of 47 for the same multiple, Nvidia barely beats AMD by the same metric, even though its recent growth has been much higher.
However, because it is categorized as a semiconductor stock, AMD’s current valuation does not fully reflect its long-term revenue potential. For a company just entering the AI GPU business, AMD’s data center growth was off the charts. The market will continue to respond positively to AMD’s offering as cloud providers welcome the competition. Many don’t want to be locked into Nvidia’s ecosystem.
According to some estimates, the AI market could grow to $403 billion by 2027 and $1 trillion by 2030. These projections show the extent to which AMD can benefit from AI’s long-term revenue potential.
Cloud providers want competitive chip prices, which opens a wide door for AMD and others to take Nvidia’s market share. With its focused AI data center strategy, AMD’s valuation as an AI stock will increase over time as the company’s rising earnings show that its AI growth potential is sustainable over the long term.
Investors should not expect short-term gains from the stock. Buying AMD is only suitable for those with a long-term investment horizon.
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The Motley Fool holds positions in and recommends Advanced Micro Devices, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy. John Kinsellagh has no positions in any of the stocks mentioned in the article.
AMD may not beat Nvidia, but here’s why it’s still a long-term buy was originally published by The Motley Fool