Last week I wrote about how Nvidia (NASDAQ:NVDA) stock is a better bet on generative artificial intelligence than rival Advanced Micro Devices (NASDAQ:AMD) stock. Readers who then looked at my disclosures came away confused. I still own AMD stock in my retirement account.
Before y’all @ me, I decided to write this column about AMD stock to explain what may look like a contradiction. It comes down to two points. First, AI isn’t all there is to computing. Second, being second in a fast-growing market is not a crime. Let’s take these one at a time.
Other Computing Markets
AMD makes both Graphics Processing Units (GPUs), which compete directly with those of Nvidia, as well as Central Processing Units (CPUs), which primarily compete with Intel (NASDAQ:INTC).
AMD trails Nvidia in GPUs, but it has been gaining share against Intel in CPUs.
The PC market is also growing again. Sales were up 9% in the third quarter. AMD stock is thus well-positioned, with 35% of a growing PC market, to have a very merry Christmas.
Second is Xilinx, which AMD bought in February. Xilinx makes what are called “embedded processors,” chips pre-loaded with software for all cars, consumer devices, and business controllers. Xilinx was dominating this market, but JPMorgan Chase (NYSE:JPM) analysts figure they can be sold alongside AMD’s CPUs to gain serious market share.
Gen AI and AMD Stock
Generative AI has sparked a new growth cycle for chip makers. It’s true that AMD is second in the GPU market. But that market is growing, on the client side and the server side. AMD’s share is also growing a bit.
The weakness is on the server side, where Nvidia’s software makes it the first choice. Right now, Cloud Czars like Amazon.Com (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) are paying up for Nvidia chips to get its software.
They don’t like it. Clouds were cheap computing power. An AI workload, combining huge databases training Large Language Models, uses up processing power like nothing before. Cloud Czars aren’t growing their geographic footprints as they work to upgrade. They’re leaving some of the cloud market’s growth on the table.
But the market doesn’t remain stationary for long. The Cloud Czars hate being dependent on a single vendor. They’re all designing their own silicon in hopes of diversifying away from Nvidia. This benefits AMD, which can work with their new software and help provide an alternative source of supply. Niches are already opening. A new AMD “accelerator chip,” the MI300x, will offer another way through.
Despite running second in AI, AMD’s projections for 2024 are looking good to analysts. There aren’t many companies in the AI chip race and AMD is one of them.
The Bottom Line
One of the strangest stories this year is that AMD CEO Lisa Su and Nvidia founder Jensen Huang are first cousins once removed. Huang’s mother is the sister of Su’s grandfather. Tainan, the former Taiwan capital from which both emigrated, isn’t a huge town.
But the same relationship holds with the stocks. Nvidia and AMD are cousins, in a way, both competing for the same customers.
AMD doesn’t have to “beat” Nvidia to win, to be a stock worth owning. My AMD position is smaller than the one I have with Nvidia. I expect both stocks to do well . You don’t have to sell one to own the other.
Finally, there’s always the chance I’m wrong. The Czars could diversify away from Nvidia faster than we think, and AMD’s prices could let it gain share. I want to be there for that.
As of this writing, Dana Blankenhorn had LONG positions in AMD, NVDA, INTC, AMZN, MSFT and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
