Stocks to buy

The Semiconductor Race: Is AMD Gearing Up to Rival Nvidia’s Throne?

Advanced Micro Devices (NASDAQ:AMD) is a top semiconductor stock that many investors think can eventually rival Nvidia (NASDAQ:NVDA) over the long run. However, with AMD’s market capitalization of $275 billion, compared to Nvidia’s $1.55 trillion, we see quickly that the market doesn’t view these companies as comparable.

Now, AMD has posted some rather strong results, showcasing 10% year-over-year revenue growth in Q4. The company’s $6.2 billion in revenue and net income of $667 million are nothing to sneeze at. But the question many investors have remained unanswered: is it possible for AMD stock to eventually rival Nvidia in terms of size?

Let’s dive into this question and what hurdles face AMD in its race for market share.

Disappointing Sales Forecast

Despite exceeding Q4 revenue estimates, AMD shares nosedived after providing a Q1 sales forecast below expectations. The company’s management team indicated weaker demand for PC chips and CPUs. The company predicted declining chip sales and data center revenue, with GPU sales offsetting the CPU cooldown. Despite this, AMD increased its 2024 AI GPU chip sales forecast from $2 billion to $3.5 billion, emphasizing collaborations with key cloud customers like Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), and Meta (NASDAQ:META).

The company’s fourth quarter reported revenue of $6.17 billion marked a step forward for investors. This was better than the consensus expectations of $6.12 billion, with the company seeing stronger-than-expected data center and user growth. Following the earnings release, AMD shares initially surged but have since given up their gains and then some.

Where AMD Lacks

In the GPU world, Nvidia is king of this realm with the best high-performance graphics cards. AMD’s RX 7900 XTX generally doesn’t compare to Nvidia’s RTX 4090.

That said, the graphics card stage opened to new releases in 2023. Increased competition, expectations of new chip releases, and evolving software solutions could provide AMD with a long-term boost. However, despite playing a role in resolving the GPU shortage, AMD has yet to throw down the gauntlet at Nvidia’s ruling RTX 4090 in PC gaming hardware.

Analysts estimate that AMD’s RDNA lineup against Nvidia’s RTX 40-series won’t be the first choice for PC builders. AMD lacks Nvidia’s broad selection and still lags on some metrics.

The race between these two companies could peak in a matchup between the RTX 4080 and Rx 7900 XTX, but Nvidia might bring a new contender – the RTX 4080 Super. Performance-wise, AMD can generally keep up with Nvidia. The RX 7900 XTX is faster than the RTX 4080, and the RX 7800 XT outpaces the RTX 4070. That said, it’s about sales at the end of the day, and it’s unclear how much ground AMD will be able to make up against the market leader over time.

Unfortunately, Nvidia holds a dominant position in chips precious to gamers– the enhancer DLSS 3.5. The RTX 4070 powered with DLSS is cost-competitive, providing questions about AMD’s FSR 3.0 and future upgrades. With Nvidia reigning in the GPU segment, AMD may try other approaches to pursue market share.

AMD Stock is Still a Good Buy

AMD has come a long way since 2015, thanks to its innovation and enhanced profitability. Indeed, AMD stock has surged remarkably, though perhaps not to the degree of its rival. Led by Lisa Su, AMD provides intense competition in the CPU and GPU space, though the jury remains out as to which company’s chips will ultimately be in higher demand five or ten years from now. The future is uncertain, and a lot of innovation will happen in the years to come. Thus, it will be interesting to see AMD’s progress over this time frame.

From a relative valuation perspective, AMD is certainly worth a look here. Long-term growth investors have benefited from owning both stocks. So, if the goal is to generate exposure to long-term chip trends, investors can comfortably own both stocks to capture most of the market move in this space.

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.

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