Nvidia's Shares Soar by 187% in 2024, Yet Wall Street Suggests an Additional Promising Semiconductor Stock to Invest in for 2025
Nvidia's Shares Soar by 187% in 2024, Yet Wall Street Suggests an Additional Promising Semiconductor Stock to Invest in for 2025
Nvidia is currently the primary provider of graphics processing units (GPUs) for data centers, which are instrumental in the development of artificial intelligence (AI) models. The company's stock has surged by 187% this year due to its impressive revenue growth as demand for chips continues to exceed supply.
However, Jensen Huang, Nvidia's CEO, believes data center operators will invest $1 trillion in upgrading their infrastructure to cater to AI developers over the next four years. This massive market potential is large enough to accommodate multiple GPU suppliers. Recently, Advanced Micro Devices (AMD) introduced its own series of AI GPUs and has already secured some of Nvidia's major clients.
Here's why AMD's stock could be an excellent investment opportunity for the new year, even for investors who already have shares in Nvidia.
Competing with Nvidia in the data center market
Initially, Nvidia held an estimated 98% share of the data center GPU market in 2023 due to a lack of competition for its H100 chip. However, AMD introduced its MI300X GPU in December, attracting prominent customers such as Microsoft, Meta Platforms, and Oracle.
AMD claims these data center operators experience improved performance and lower costs of ownership with the MI300X compared to the H100, which could help AMD gain market share. However, Nvidia isn't resting on its laurels. Its H200 is already available, providing twice the power of the H100, and it has recently launched its new Blackwell GPUs.
The Blackwell-based GB200 NVL72 system can perform AI inference 30 times faster than the equivalent H100 system, leaving AMD with a significant challenge to compete. AMD has started shipping its MI325X to customers, offering 20% better inference performance than the H200, which is a positive start.
However, investor attention has shifted towards AMD's MI350 series, which should be available to customers in the second half of 2025. It utilizes the company's new CDNA (Compute DNA) 4 architecture, delivering a 35x performance boost compared to CDNA 3 chips like the MI300. In essence, it's set to become a formidable competitor for Nvidia's Blackwell chips, even though it will be launched six months later.
AI developers typically pay for computing capacity by the minute, so faster chips can result in significant cost savings. Performance can ultimately determine which chip giant captures market share, resulting in intense competition between Nvidia and AMD to launch faster chips every six to 12 months.
The data center isn't AMD's only AI opportunity
Although data centers will continue to play a crucial role in AI model training and inference support, advances in the chip technology inside smartphones and computers are enabling some AI workloads to be processed on-device. This results in a faster user experience as chatbot queries, for example, do not require a trip to the data center before a response can be generated.
AMD leads the market in AI chips used in personal computers (PCs). Its Ryzen AI 300 Series offers exceptional performance across the GPU, CPU, and new neural processor (NPU), making it easy for users to run AI chatbot applications. In fact, the Ryzen AI 300 Series is three times more powerful than AMD's previous generation of chips when it comes to AI performance. It is already powering Microsoft's new Copilot+ PCs, and manufacturers like Lenovo and HP plan to double the number of Ryzen AI devices they offer by the end of 2024. In 2025, AMD expects there to be more than 100 computing platforms using these chips in commercial settings.
AMD's AI revenue is skyrocketing
AMD reported a record $6.8 billion in total revenue during the third quarter of 2024 (Sept. 28), representing an 18% increase from the previous year. However, its AI-related segments demonstrated much faster growth.
The company's data center revenue grew 122% to a record $3.5 billion, driven largely by GPU sales. AMD CEO Lisa Su now forecasts GPU revenue alone to reach $5 billion in 2024, representing an increase of more than 150% from her initial projection for the year.
AMD's client segment revenue climbed 29% to $1.9 billion, housing the Ryzen AI chips. Considering Su believes the AI PC cycle is still in its infancy, investors should anticipate robust growth in this segment throughout 2025.
The reason AMD's overall revenue growth did not exceed 18% is due to a 69% decline in gaming segment sales compared to the previous year. Demand for flagship consoles like Microsoft's Xbox and Sony's PlayStation 5 is waning, and PC gamers are eagerly awaiting the release of the new generation of AMD GPUs in 2025.
Based on Yahoo!'s predictions, Wall Street anticipates AMD's earnings per share (EPS) to surge an astonishing 54% to $5.14 in 2025, resulting in a forward price-to-earnings (P/E) ratio of 27.6. This would mean AMD's stock would need to surge by an additional 71% in the following year to simply match its current P/E ratio of 47.3, based on its trailing-12-month EPS of $3. Given the stock's current high growth potential, the Street's highest predicted target might even be achievable.
AMD's forward P/E ratio is significantly lower compared to Nvidia's present 31.3. While Nvidia justifiably commands a premium valuation due to its faster revenue and earnings growth compared to AMD currently, and its dominant position in the data center GPU market, the sector's market share is likely to diminish for Nvidia, opening potential opportunities for AMD's growth.
In addition, AMD, with its leadership in the AI PC chip segment, sits at the forefront of the upcoming major growth driver for the AI industry. Therefore, AMD's stock is an appealing investment option heading into 2025. For current Nvidia stockholders, diversifying some of their risk by investing in AMD could be beneficial as they vie for market share in the data center industry.
In the competitive landscape of AI chip providers, AMD has secured significant clients like Microsoft, Meta Platforms, and Oracle with its MI300X GPU, offering improved performance and cost savings compared to Nvidia's H100. (finance, money, investing)
AMD's AI revenue, primarily driven by GPU sales, demonstrated remarkable growth in its data center and client segments, with data center revenue reaching a record $3.5 billion and a forecast of GPU revenue alone reaching $5 billion in 2024. (finance, money, investing)