The debut of ChatGPT last year didn’t mark the start of artificial intelligence technology, but it got everyone thinking about just how far it could go. Like other semiconductor stocks, Advanced Micro Devices (NASDAQ:AMD) rode the wave of interest to new heights this year. Shares of AMD stock more than doubled in 2023.
However, rival Nvidia (NASDAQ:NVDA) is the clear winner so far. Its advanced chips were almost purpose built for AI’s complex computing power. Yet AMD is quickly making up for lost time.
Its new AI accelerator chip, the Instinct MI300X, gave AMD the chance to steal market share. Although this tech matchup is being covered like a horse race, that’s not the right way for investors to think about it.
AI is still a nascent technology with broad applications across almost every industry. We’re still in the first inning of its growth that will play out over multiple years.
The opportunity is so large there are going to be several winners if not many. Investors should ignore the oneupmanship going on right now and look at where AMD stock will be five or 10 years down the road.
The AI Universe Expansion
There are many facets of how AMD can win without ever actually “beating” Nvidia. Or looked at differently, AMD will excel in certain markets but lag in others. It will still profit from all of them.
According to a recent Deloitte analysis, the market for specialized AI chips is massive. From a conservative $110 billion total addressable marketing to a more aggressive $400 billion, they also admit we could be in a bubble.
We may see large sales of AI chips for the next year or so before demand collapses. Still, there are pockets of opportunity.
The market for accelerator chips is especially large. AMD CEO Lisa Su thinks Deloitte isn’t thinking big enough. She sees AI accelerator chips in data centers surging 70% annually to hit $400 billion by 2027. Previously AMD forecast a $150 billion TAM.
AMD’s Profits Expand
Bank of America (NYSE:BAC) analysts are somewhere between those extremes. They forecast a $100 billion market but see AMD growing revenue to $5.5 billion in that segment by 2025.
That’s an increase from their prior estimates of $3 billion in sales and they say it should grow to $8 billion in 2026. Yet that will still have AMD with a relatively small mid-single-digit share of the market. Nvidia will still dominate with a 75% share and Broadcom (NASDAQ:AVGO) will be second at 10%.
Perhaps disappointing for some, but it would put revenue on par with where AMD’s data center CPUs currently sit. Going from nothing to that size in the space of a few years is a tremendous advance. It will also allow AMD to make inroads into Intel‘s (NASDAQ:INTC) hold on the server CPU market.
But importantly, Bank of America estimates every $1 billion in accelerator sales translates into $0.25 per share in earnings. The analysts say it will be the single biggest driver of earnings growth for AMD going forward.
The next leg up
AMD already stole a few large Nvidia customers out of the gate. Meta Platforms (NASDAQ:META), Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), and OpenAI all said they will adopt AMD’s MI300X chip.
It could win even more and significantly add to its profit margins if it prices the new chips right. Cathie Woord’s Ark Invest estimates pricing the MI300X in the $18,000 to $19,000 per chip range would capture even more share as customers switched from Nvidia’s pricey $25,000 to $40,000 chips. AMD’s MI300X offers substantial performance enhancement compared to NVDA’s H100. Customers who switched would realize both cost savings and greater efficiency.
Of course, Nvidia has its H200 chip out and that is even faster, albeit considerably more expensive. But the industry leader’s software offers seamless integration with its hardware, making it a difficult combination to beat.
AMD Stock Is a Winner
It’s why Advanced Micro Devices doesn’t need to take down Nvidia, Intel, or Broadcom everywhere. Just capturing a very small share of the market can provide a tremendous boost to profit margins and ultimately shareholder returns.
Investors may cheer on AMD becoming the unquestionable industry leader but it’s not necessary. Right now there is more demand than any one company can satisfy. Advanced Micro Devices stock remains a high-octane, long-term investment.
On the date of publication, Rich Duprey did not hold (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.
