AMD and Nvidia: AI Giants Poised for Significant Growth by 2027

Prediction: These 2 Artificial Intelligence (AI) Stocks Are About to See Massive Growth | The Motley Fool

Super Micro Computer and Advanced Micro Devices are well positioned, and they don't look overpriced. Many stocks tied to artificial intelligence have experienced significant price action over the last year. Some surged to all-time highs and kept moving higher, while others pulled back as investors tempered their expectations about the future. Although many AI stocks will not experience massive surges, some are well-positioned for considerable growth. Investors seeking those with the potential for such increases may want to consider stocks like Super Micro Computer (SMCI -19.02%) and Advanced Micro Devices (AMD -2.75%). Although Supermicro is still down more than 50% from its peak in March, it has experienced a fantastic run-up of more than 3,000% over the last five years. The manufacturer of technology hardware has been in business since 1993 and began trading on the market in 2007. Nonetheless, it spent most of its existence in relative obscurity, known only to those in the tech industry. Its server technology only became more popular as more computing workloads shifted to the cloud. That trend accelerated during the COVID-19 pandemic, leading to increases in its stock. Supermicro was one of the few tech stocks that rose during the 2022 bear market. Still, the largest chunk of its rise began in the spring of 2023, when investors discovered that Nvidia's AI chips powered Supermicro's servers. Allied Market Research forecasts a compound annual growth rate of 38% for the AI chip market through 2032. That anticipated growth has become a catalyst for Supermicro, lifting its stock from just $82 per share at the beginning of 2023 to a peak of $1,229 per share less than 15 months later. Although the stock has since pulled back, the popularity of its servers has boosted its financials. It reported $15 billion in revenue in the first six months of 2024, a 110% increase compared to the same period in 2023. The rising cost of sales has weighed on its profitability. However, the $1.2 billion in earnings it reported in the first half of 2024 was still 89% higher than prior-year levels. Moreover, the pullback may have created an excellent opportunity for new investors to pick up shares. Investors can now buy Supermicro stock at 31 times earnings, and with its massive growth, its price/earnings-to-growth (PEG) ratio is only 0.4, indicating that the market has not fully priced the company's growth potential into the stock. Given the level of demand for its servers, Supermicro's growth is unlikely to slow anytime soon. And given its current low PEG ratio, now is probably an excellent time to add shares. AMD, like most other chip stocks, was overshadowed by Nvidia due to that company's massive lead in the AI chip market. While no rival is likely to overtake Nvidia soon, AMD may be the one with the best shot to become the No. 2 company in that niche. Late last year, AMD debuted its MI300 series of AI chips. While Nvidia countered with a release of its own, AMD moved to boost its capabilities in this area. It recently completed its acquisition of Silo AI, the largest AI lab in Europe. It also recently inked a deal to buy ZT Systems, an AI infrastructure provider. These additions should improve AMD's competitiveness in the data center AI market, helping it close some of the technical gap with Nvidia. The data center segment, which includes its AI chips, increased its revenue in the first half of 2024 by 98% year over year, compared to just 6% growth for the company overall. The segment's $5.2 billion in revenue was 46% of AMD's overall revenue of $11.3 billion in the first half of 2024. That percentage represents a critical change for AMD. In the first half of 2023, the data center segment provided 24% of AMD's revenue, a smaller share than its gaming and embedded segments. Today, with gaming and embedded reeling from sharp sales plunges, the data center segment is an increasingly dominant part of the company. If Nvidia's history is any indication, this trend may continue for AMD. In the first quarter of Nvidia's fiscal 2025 (which ended April 30), the data center segment delivered 87% of company revenue, a profound change from two years before when data center segment sales just barely edged out revenue from gaming. This pattern suggests that AI chips could also become AMD's dominant focus in the near future. For now, AMD's P/E ratio is 189 -- but it only recently returned to profitability, making that a misleading metric to use to gauge its valuation. Its price-to-sales (P/S) ratio of 11 is far below Nvidia's 40 sales multiple. Assuming its fast-growing data center revenue continues to grow as a share of the company's revenue, it could bring about the accelerated growth that will draw more investors into AMD stock.

Where Will AMD Stock Be in 3 Years? | The Motley Fool

The semiconductor specialist's stock could deliver a much better performance than it has been lately. The past three years have been complicated for Advanced Micro Devices (AMD -2.75%) investors. Shares of the chipmaker have remained under pressure due to weakness in the personal computer (PC) market; at the same time, tough competition from rival Nvidia in the gaming and data center graphics cards segments has also dented investor confidence in the stock. As it turns out, AMD shares have gained 44% over the past three years, underperforming the PHLX Semiconductor Sector index's 56% gains. However, it won't be surprising if the company's fortunes turn around over the next three years. PC shipments fell almost 14% in 2023, according to IDC, following a 16.6% decline in 2022. However, the PC market has started to recover over the past few quarters. IDC reports that the PC market recorded 3% year-over-year growth in the second quarter, following a 1.5% jump in Q1. That recovery is likely to get stronger in the future thanks to the growing buzz around artificial intelligence (AI)-enabled PCs. IDC estimates that annual AI PC shipments could grow from 50 million units in 2024 to 167 million units in 2027. This could pave the way for solid growth in AMD's client processor business, where it has been gaining ground against Intel. According to Mercury Research, AMD's share of the desktop CPU (central processing unit) market increased to 23% in the second quarter from 19.4% in the same period last year. Its share of notebook CPUs increased to 20.3% in Q2 from 16.5% in the prior-year period. This improving market share and the overall growth in PC volumes resulted in AMD's client revenue rising by 49% year over year to $1.5 billion in the second quarter. CEO Lisa Su believes that the company is "well positioned for ongoing revenue share gains based on the strength of our leadership portfolio and design win momentum." If AMD continues to win a bigger share of the PC CPU market over the next three years, it could record healthy growth in its client segment. AMD's data center business has historically been driven by its Epyc server processors, which compete against Intel's offerings. Just as it has in the client CPU market, AMD has been eating into Intel's dominant position in the server CPU space. It controlled 24.1% of the server CPU market in the second quarter, up from 18.6% in the same quarter last year. AMD management estimates there will be a total addressable market (TAM) of $42 billion in server CPUs in the long run. The company finished 2023 with data center revenue of $6.5 billion, the majority of which came from sales of server CPUs. More specifically, AMD launched its MI300 line of data center graphics processing units (GPUs) in December last year, and this product line delivered over $400 million in revenue in the fourth quarter. So, it can be estimated that AMD sold around $6 billion worth of server CPUs last year. Given the size of the addressable opportunity and AMD's growing influence in this space, it won't be surprising to see the company's data center CPU revenue improving considerably in the future. But more importantly, the sharp acceleration that the company is anticipating in sales of its data center GPUs this year is going to kick this segment's growth into a higher gear. We have already seen that AMD sold around $400 million worth of data center GPUs in Q4 of 2023, which was the quarter during which it launched its MI300 AI accelerators. The chipmaker is anticipating its data center GPU revenue to exceed $4.5 billion in 2024, which would be a jump of more than 10-fold from the prior year. This suggests that AMD is solidifying its position as the second-largest player in the data center GPU market behind Nvidia. That's not a bad spot to be in, considering that AMD expects the data center AI accelerator market to hit $400 billion in revenue in 2027. This additional catalyst for AMD should ideally give it a major boost and supercharge its growth over the next three years. AMD has been taking steps to ensure that it becomes a key player in the AI market. These include a couple of key acquisitions that were announced in the past couple of months. In August, AMD completed its acquisition of Silo AI in a deal valued at $665 million. It will now be aiming to offer end-to-end AI solutions to customers thanks to Silo AI's expertise in developing large language models (LLMs). In simpler words, AMD is taking steps toward becoming a complete provider of AI solutions, including software, rather than simply focusing on making hardware. That's a smart thing to do considering the massive opportunities in the AI software market. And now, AMD has decided to spend $4.9 billion to buy ZT Systems, a company that's known for designing and manufacturing server and storage systems. ZT Systems will become a part of AMD's data center business when the transaction closes in the first half of next year. AMD intends to divest ZT's server manufacturing division, which seems like a good move considering the low-margin nature of this business. But by retaining ZT's design capabilities, AMD intends to offer complete AI server solutions comprising its Instinct AI GPUs, Epyc server processors, and networking products instead of only selling individual components. So, AMD intends to become a one-stop shop for companies looking to deploy AI server systems. This strategy could reap rich rewards in the long run considering that Nvidia sells complete server rack systems for as much as $3.8 million depending on configuration, and it is witnessing solid demand for its end-to-end systems because of their faster computing abilities and lower operating costs. In the end, it can be concluded that AMD is sitting on stronger growth drivers for the next three years. Not surprisingly, analysts are expecting a sharp acceleration in its earnings from 2023 levels of $2.65 per share. Based on the company's 2026 earnings forecast, its bottom line is set to increase at a compound annual rate of 40% over the next three years. So investors looking to add an AI stock to their portfolios would do well to buy AMD as it seems poised for stronger gains than it delivered in the past three years.