This Overlooked AI Chip Stock Could Be the Next Nvidia

Stocks to buy

Advanced Micro Devices (NASDAQ:AMD) shares have surged 65% year-to-date amid optimism about its AI prospects, but the company faced challenges due to a PC market downturn. Nvidia’s (NASDAQ:NVDA) AI success underscored AMD’s lag, yet AMD stock has grown 212% over the last five years, making it a leader worth watching.

Many investors have shifted their focus from AMD to Nvidia, but it’s unwise to overlook AMD’s growth potential. AMD remains innovative, introducing powerful tech hardware like EPYC CPUs and Pensando DPUs, which can tap into the AI trend, much like Nvidia.

Let’s look into the impact of AMD’s recent strategic moves and understand why investors are interested in the company now. 

AMD Stock: A Top Player in the AI Game

AMD’s recent acquisition of French firm Mipsology highlights its proactive stance in the AI-tech wave this year. With the acquisition completed, AMD gains access to Mipsology’s AI inference and optimization tools, along with its skilled software team, underscoring AMD’s commitment to advancing AI technology.

AMD is also partnering with Hitachi Astemo to advance an innovative automotive camera system, leveraging AI for enhanced object detection and safe driving. The company is providing a system-on-a-chip, enabling the camera to detect objects over a 120-degree angle. This is significantly wider than previous-generation cameras and boosts overall safety.

AMD Is Driven and Capable

AI represents a transformative megatrend, akin to the internet and smartphones, with rapid growth. Statista predicts the global AI market could reach $2 trillion by 2030. However, similarly to the dot-com bubble, not all companies entering the AI space will endure.

Aug. 24 proved challenging for AMD investors after Nvidia outperformed earnings expectations for Q2 2023, while AMD slightly surpassed Wall Street’s EPS estimate of 57 cents with earnings of 58 cents per share.

While Nvidia’s impressive EPS beat drew attention, AMD’s performance may have seemed lackluster, causing a nearly 7% drop in AMD’s stock to $101.80 on Aug. 24. Some analysts like Mizuho’s Jordan Klein believed that no one could match Nvidia in the semiconductor market, but I disagree. Global X research analyst Tejas Dessai highlighted the potential for replacing aging computational infrastructure in data centers. This presents substantial opportunities in the evolving computing landscape.

What Now

A strong argument for choosing AMD stock over NVDA is its more favorable valuation. In 2023, both companies have performed well, with AMD up 66% and Nvidia up 218%. However, Nvidia’s soaring stock price has pushed its price-to-sales multiple to 36-times. That’s significantly higher than the S&P 500 average of 2.5 times and more than four times AMD’s price-to-sales ratio of only 8 times. 

While Nvidia is poised to benefit from AI, AMD offers a value-oriented approach to seize the opportunity. Despite being overshadowed by AI-focused companies, AMD remains a strong contender in the tech world. It should be considered among the top chipmakers and AI players, making it a smart investment choice.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.