AMD Takes Aim at Nvidia: A New Era in GPU Competition

Nvidia is currently the top provider of graphics processing units (GPUs) for data centers, vital for developing artificial intelligence (AI) models. As of now, its stock has skyrocketed by 187% this year, driven by remarkable revenue growth fueled by high demand for chips that surpasses supply.

CEO Jensen Huang predicts that data center operators will invest $1 trillion to upgrade their infrastructure for AI over the next four years. This significant opportunity may allow multiple GPU companies to thrive. Advanced Micro Devices (NASDAQ: AMD) has also entered the race with its own AI GPUs, capturing the interest of some of Nvidia’s major clients.

Here’s why AMD stock could be a smart investment in the upcoming year, even for those already holding Nvidia shares.

AMD Challenges Nvidia’s Dominance in Data Centers

Nvidia held approximately 98% of the market share for data center GPUs in 2023, largely unchallenged thanks to its flagship H100 chip. However, AMD released the MI300X GPU in December, quickly drawing in significant customers like Microsoft, Meta Platforms, and Oracle.

A number of data center operators are experiencing improved performance and reduced costs by using the MI300X over the H100, which could help AMD gain market share. Nevertheless, Nvidia is not idle; its H200 chip is already available, boasting double the power of the H100, while it has begun shipping its new Blackwell GPUs.

The Blackwell-based GB200 NVL72 system offers AI inference at 30 times the speed of the H100, making AMD’s path to catching up quite challenging. AMD recently launched the MI325X, which promises 20% better inference performance than the H200—a positive step forward. Investors are particularly excited about AMD’s upcoming MI350 series, expected to reach customers in the second half of 2025. This series, utilizing the new CDNA (Compute DNA) 4 architecture, will reportedly provide a 35-fold performance boost compared to current chips like the MI300.

AI developers typically pay for computing capabilities by the minute. As a result, faster chips can lead to significant cost savings. This performance aspect is key to determining which company will dominate the market, prompting both Nvidia and AMD to rapidly release new chip models every few months.

More AI Opportunities for AMD Beyond Data Centers

While data centers are crucial for training AI models and inference tasks, chips in smartphones and computers are now capable of handling some AI workloads directly. This trend enhances user experience, as tasks like chatbot queries can be completed without relying solely on data center responses.

AMD is leading the way in AI chips for personal computers (PCs). Its Ryzen AI 300 Series features outstanding performance across GPUs, central processors (CPUs), and new neural processors (NPUs), enabling seamless operation of AI applications.

The Ryzen AI 300 Series is three times more powerful in AI performance than AMD’s previous chips. These chips already support Microsoft’s new Copilot+ PCs, and companies such as Lenovo and HP plan to triple their offerings of Ryzen AI devices by late 2024. AMD anticipates that over 100 computing platforms will employ these chips in commercial applications by this time next year.

AMD’s AI Revenue is on the Rise

In the third quarter of 2024 (ending September 28), AMD achieved a record $6.8 billion in total revenue, an 18% increase from the previous year. However, its AI-related revenue has grown even more rapidly.

The data center revenue surged by 122% to a record $3.5 billion, primarily fuelled by GPU sales. CEO Lisa Su now estimates that GPU revenue alone could reach $5 billion in 2024, significantly higher than her early projection of $2 billion for the year.

The client segment, which includes the Ryzen AI chips, saw a 29% increase, reaching $1.9 billion. With Su indicating that the AI PC cycle is still emerging, this segment is poised for strong growth through 2025. Despite this strong performance, overall revenue growth was limited to 18% due to a 69% decline in the gaming segment, as demand waned for major consoles like Microsoft’s Xbox and Sony‘s PlayStation 5; gamers await new AMD GPUs slated for release in 2025.

Image source: Getty Images.

Analysts Are Positive on AMD Stock

The Wall Street Journal reports that 54 analysts monitor AMD’s stock, with 37 assigning it a strong buy rating. An additional seven analysts recommend overweight positions, while 10 suggest holding the stock. No analysts advise selling at this time.

Analysts project an average price target of $185.77 over the next 12 to 18 months, suggesting a 31% upside from the current stock price. A particularly optimistic target of $250 indicates that AMD stock could increase by 76%.

According to Yahoo!, the consensus estimate for 2025 forecasts a 54% growth in AMD’s earnings per share (EPS) to $5.14, giving it a forward price-to-earnings (P/E) ratio of 27.6. To align with its current P/E ratio of 47.3 (based on trailing-12-month EPS of $3), the stock would need to rise by 71% in the coming year; the analysts’ target could be achievable.

AMD’s lower forward P/E ratio compared to Nvidia’s 31.3 makes it an appealing choice. While Nvidia commands a premium valuation due to its faster revenue and earnings growth, its substantial market share may start to shrink, opening the door for AMD to capture shares in this segment. Furthermore, as a leader in AI PC chips, AMD stands at the forefront of potential growth in the AI industry.

AMD stock appears to be a solid option for any investor as we head into 2025. Additionally, Nvidia investors might consider buying AMD shares as a measure to diversify their risks in the data center market.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, HP, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. 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.