It’s nearly impossible to read or listen to anything even remotely related to artificial intelligence (AI) and not find a reference to Nvidia. The company’s graphics processing unit (GPU) chipsets are perhaps the single most important piece of architecture used in generative AI.
Don’t believe me? Industry research suggests that Nvidia held 98% of GPU shipments over the last two years; meanwhile, Jon Peddie Research estimates that Nvidia owns 88% of the GPU market. With a stat line like this, is it fair to say that Nvidia is the best AI opportunity out there? Maybe.
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But considering shares of Nvidia have gained more than 800% over the last two years, I’m inclined to think the music is going to slow down at some point. Below, I’m going to outline two AI opportunities that I think are poised to break out over the next several years and give Nvidia a run for its money. Let’s dig in!
1. Advanced Micro Devices
The first company on my list of top AI stocks is Advanced Micro Devices (NASDAQ: AMD). Over the last couple of years, AMD has been frequently benchmarked against Nvidia — a comparison that I don’t find to be particularly apples-to-apples.
Since the dawn of the AI boom, Nvidia’s primary source of growth has come from its H100 and H200 GPUs. As I alluded to above, Nvidia’s one-two punch GPU architecture helped the company acquire nearly the entire market. While Nvidia’s compute and networking products are indeed quite powerful, one thing that also helped the company gain such an enormous lead in the marketplace was a lack of competition.
AMD has been quietly building its own GPU empire over the last year or so, but it’s nowhere near the size of that of Nvidia. In my eyes, that could soon change. AMD’s answer to Nvidia’s H100 and H200 GPU combo is its own chip accelerator dubbed MI300. When the MI300 launched earlier this year, AMD’s management was guiding for revenue around $2 billion. But during the company’s third-quarter earnings call a few weeks ago, AMD CEO Lisa Su hinted that the MI300 is scaling so quickly that the company’s data center GPU business is now on pace for $5 billion in sales this year.
The best part about this is that many of AMD’s major customers adopting the MI300 architecture are also customers of Nvidia. When you layer on top that there could be more than $1 trillion of AI infrastructure spend over the next few years, AMD looks well-positioned to continue capturing incremental market share as it scales its data center GPU operation.
Yet despite the positive narrative, AMD stock doesn’t seem to be getting much love. Right now, AMD shares trade at a forward price-to-earnings (P/E) multiple of 27.1 — far lower than Nvidia’s forward P/E ratio of 36.1.
I think investors are missing the forest for the trees when it comes to investing in AMD. While I don’t think the company is going to speed past Nvidia by any means, I do think AMD has an opportunity to gain momentum as it releases next-generation GPU products and becomes a more serious competitor to Nvidia over time.
I think AMD’s valuation relative to Nvidia suggests that investors are discounting the company’s future growth prospects. In my eyes, AMD stock looks reasonable at these levels, and I think it is a compelling buy for investors with a long-term time horizon.
2. Amazon
Next up on my list is one of Nvidia’s peers in the “Magnificent Seven,” Amazon (NASDAQ: AMZN). While Amazon is primarily known for its e-commerce marketplace, the company is also a dominant force in cloud computing. Amazon Web Services (AWS) is on pace to generate over $100 billion in revenue this year. What’s even better is that AWS’ operating profits are accelerating even faster than sales.
This dynamic has equipped Amazon with tens of billions in free cash flow and a balance sheet that boasts $88 billion in cash and equivalents. Although this is encouraging, I think the party is just getting started. Amazon is aggressively deploying its profits into a number of capital expenditure (capex) investments — namely, billion-dollar data center infrastructure projects in combination with building its own in-house training and inferencing chips.
That’s right, Amazon is building its own chips. Candidly, I think this is a development that gets very little coverage, and one that has become entirely overshadowed by Nvidia’s narrative. Along the same lines as AMD, I think Amazon’s pursuit of the chip market could become a headwind for Nvidia in the long run. As more GPU architecture is introduced to the market, it’s reasonable to believe that Nvidia’s grasp on top pricing power will weaken, thereby resulting in decelerating revenue and profit margins.
AI represents a lucrative opportunity for Amazon to further strengthen its various business segments, and yet its valuation suggests the opportunity is not really baked into the company’s outlook.
I think AI will help Amazon become an even more efficient, profitable business in the long run. But right now, Amazon is trading at historically cheap levels on a price-to-free cash flow basis. I think Amazon is an underrated opportunity in the AI realm, and one that is trading at too much of a bargain to pass up right now.
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