The semiconductor industry is gearing up for a potential showdown in 2024 as Advanced Micro Devices (AMD) sets its sights on challenging Nvidia’s dominance in the market. The surge in demand for artificial intelligence (AI) chips has created a ripe environment for competition, and AMD is positioning itself to steal market share from Nvidia.
Strong growth in the semiconductor industry
The year 2023 witnessed remarkable growth in the semiconductor industry, driven primarily by the increasing demand for chips, particularly in the AI sector. Companies like Nvidia and AMD, known for their high-performance chips, have reaped the benefits of this surge in demand.
Nvidia, a market leader in chip production, has seen its shares rise by a staggering 240% throughout the year. Meanwhile, AMD, its smaller rival, has not been far behind, with a respectable 112% increase in its share value by the end of 2023.
The Nvidia advantage
Nvidia’s advantage in the AI sector lies in its experience in the GPU business, allowing it to dominate the artificial intelligence market quickly. However, AMD is not resting on its laurels and is gearing up to launch a more powerful chipset in 2024. Additionally, AMD has made significant collaborations in 2023, which could help it gain a competitive edge.
Competition in the AI chip market
As the AI sector continues to grow, chip manufacturers are entering a fierce competition to meet the surging demand for AI chips. This competition is expected to contribute to the overall growth of the semiconductor industry, making chipmakers an attractive prospect for long-term investors.
AMD’s potential market share gain in 2024
While Nvidia currently boasts over 80% of the AI chip market, the rapid growth of AI companies and new entrants in the chip market could pose challenges to its market share. AMD has signaled its intent to make a bigger impact in 2024, building on its recent successes.
Tech giants like Meta and Microsoft have announced their intention to use AMD’s Instinct MI300X AI chip, a significant move aimed at reducing their dependence on Nvidia in this field. If AMD can provide a cost-effective alternative to Nvidia with optimal performance, it could experience robust growth in 2024.
In the upcoming year, AMD is set to launch the latest addition to its MI300X chip series, claiming it to be the most powerful GPU ever. Another advantage AMD holds in expanding its market share is its product diversity, which provides multiple revenue streams that may be more resilient during industry disruptions compared to its larger AI-focused rival.
Revenue growth comparison
Nvidia, with a market capitalization of $1.2 trillion (nearly four times that of AMD), is well-positioned to withstand market volatility. Nvidia’s revenue increased by a staggering 205.5% year-on-year, reaching $18.1 billion in its last quarter financial report. The primary driver of this revenue growth was a 280% increase in artificial intelligence chip sales.
In contrast, AMD reported quarterly revenue of $5.8 billion, with a more modest year-over-year revenue growth of 4.2%. While AMD is expected to be a more affordable option as an emerging company in the AI stock space, Nvidia’s financial strength makes it an attractive choice for investors.
Fair value analysis
InvestingPro’s fair value analysis suggests that Nvidia is close to its fair value when comparing price estimates based on financial modeling. On the other hand, AMD’s shares are considered overvalued by 20%, with a forecast of a correction toward the $110 level within a year.
When comparing both chipmakers in terms of gross profit and price/earnings ratio, Nvidia has a stronger gross profit margin, while it appears cheaper than AMD based on the price/earnings ratio, despite its larger market capitalization. Both stocks also provide returns well above the S&P 500.
In a comprehensive analysis, InvestingPro highlights several advantages for both AMD and Nvidia. AMD has strengths such as free cash flow exceeding net profit, anticipated net profit growth in 2023, and an excess of liquid assets over short-term liabilities. However, it faces challenges such as a declining trend in earnings per share and a high price/earnings ratio.
On the other hand, Nvidia boasts features like accelerating revenue growth, high potential for dividend payout with strong earnings, annual growth in net profit, a low price/earnings ratio relative to short-term profit growth, and sector leadership.
Both Nvidia and AMD are poised to maintain their high potential in the semiconductor industry, driven by the growing influence of AI. While Nvidia currently holds the lead based on fundamental analysis, AMD has the potential to achieve a performance similar to Nvidia’s 2023 if it effectively executes its growth strategy in the coming year.
