Nvidia Dominates AI, But Two Competitors Are Gaining Ground

Artificial intelligence (AI) discussions almost always mention Nvidia. The company’s graphics processing unit (GPU) chipsets play a crucial role in generative AI applications.

Don’t take my word for it; industry research indicates that Nvidia commanded 98% of GPU shipments over the past two years. Additionally, Jon Peddie Research estimates Nvidia’s market share at 88%. Given these figures, can Nvidia be considered the best AI investment? It’s possible.

However, with Nvidia’s shares increasing over 800% in the last two years, one might wonder how long this rapid growth will last. Below, I will outline two companies that could emerge as serious contenders to Nvidia in the coming years. Let’s dive in!

1. Advanced Micro Devices

The first strong AI investment opportunity is Advanced Micro Devices (NASDAQ: AMD). In recent years, AMD has often been compared to Nvidia, but such comparisons may not be entirely justified.

Nvidia’s growth largely stems from its powerful H100 and H200 GPUs. This one-two GPU strategy has allowed Nvidia to capture nearly the entire market. Despite its formidable products, Nvidia has benefited from limited competition, which has helped solidify its lead.

On the other hand, AMD has been developing its GPU capabilities and is closing the gap. Its MI300 chip accelerator, introduced earlier this year, is AMD’s response to Nvidia’s offerings. Initially, AMD projected MI300 sales at around $2 billion. Yet, during a recent earnings call, CEO Lisa Su noted that revenue from its data center GPU business is now expected to reach $5 billion this year.

A smart strategy for AMD is its ability to cater to Nvidia’s clients, expanding its reach in a market expected to see over $1 trillion in AI infrastructure investment in coming years.

Despite signs of positive growth, AMD stock remains underappreciated, trading at a forward price-to-earnings (P/E) ratio of 27.1, significantly lower than Nvidia’s 36.1. This may suggest that investors undervalue AMD’s future potential. While AMD may not surpass Nvidia overnight, it does hold promise as it continues to innovate and compete.

Overall, AMD’s current valuation relative to its massive competitor signals that its growth potential is not fully accounted for. At present levels, AMD appears to be an appealing investment for those with a long-term outlook.

Image source: Getty Images.

2. Amazon

The second company worth mentioning is Amazon (NASDAQ: AMZN). Though Amazon is widely recognized for its e-commerce platform, it also stands as a leader in cloud computing, with Amazon Web Services (AWS) projected to exceed $100 billion in revenue this year.

AWS profits are growing even faster than its sales, giving Amazon significant free cash flow and a robust cash balance of $88 billion. This financial strength allows Amazon to invest heavily in capital projects, including expansive data center infrastructure and the development of in-house chips.

This move into chip production is essential and deserves more attention than it typically receives. Similar to AMD, Amazon’s entry into the chip market might present challenges for Nvidia’s pricing power, which has historically influenced its revenue and profit margins.

AI offers Amazon a significant opportunity to enhance its various business operations. Despite this immense potential, Amazon’s valuation does not seem to reflect these prospects, indicating it may be undervalued currently.

In the long run, it’s reasonable to expect AI to help Amazon become even more successful. Presently, the stock is trading at historically low levels concerning its free cash flow, making it an attractive option for investors looking to capitalize on AI trends.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, and Nvidia. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.