Consider Swapping Out Nvidia for This AI Corporation's Stock as an Alternative?
In recent times, Nvidia (NVDA -1.12%) has thrived due to surging investments in AI chips. However, potential pitfalls are causing investors to question if its high valuation is justified, particularly in light of potential risks to the massive data center investments by tech giants.
Let's explore the challenges for Nvidia in the upcoming year and consider why Advanced Micro Devices (AMD 0.71%) may be the better investment choice.
The challenges ahead for Nvidia
In 2022, OpenAI's release of ChatGPT prompted companies to spend billions on GPUs for AI model training. Nvidia, the market leader for GPUs, reaped substantial profits. In 2023, Nvidia's revenue and stock price skyrocketed, transforming the company into a colossal entity with a trailing-12-month revenue of $113 billion.
However, sustaining such high growth rates is becoming increasingly difficult with such large revenue figures. Analysts predict revenue will grow 52% in 2025 – still impressive, but half the rate of the past year. One risk that could hold the company back is supply chain constraints limiting the production of its new Blackwell computing platform, set to launch this quarter.
Nvidia reports strong demand for its H200, a potential buffer until Blackwell's revenue kicks in. Nevertheless, investors should be aware that Nvidia relies on data center operators to keep spending generously on chips, and there are doubts about the sustainability of this spending trend in the near future.
China's DeepSeek as a potential catalyst for less spending
Chinese deep learning company DeepSeek claims its AI model performs just as well as top AI models from US companies, yet it cost only $6 million to develop. While some analysts question their claims, the possibility that big tech companies will seek to optimize their spending leaves an uncertain future for Nvidia's growth.
The data center market has historically experienced cycles that negatively impacted Nvidia's business, resulting in stock price drops. Recently, tech giants invested heavily in data centers. If this overspending leads to a surplus in computing capacity, it could result in a corresponding downturn in data center spending, potentially affecting Nvidia's bottom line.
AMD as a potentially better alternative with lower risk
With a decade of nearly 5,000% returns and a 100% increase in the last five years, AMD stock offers comparable growth potential to Nvidia at a lower valuation. It faces the same risks as Nvidia but has a smaller market share and lower reliance on data center GPUs for revenue (only 20% in 2023).
Moreover, AMD's focus on AI inferencing provides a potential advantage. Its MI300X chip is used by Microsoft for its Azure cloud services, while their MI325X version boasts up to 20% higher AI inference performance than Nvidia's H200. AMD could see significant growth in data center GPUs in the coming years at a more attractive price point.
Investors should consider the high expectations built into Nvidia's share price and potential risks that could send the stock down, making AMD a more appealing choice with its lower valuation, comparable growth potential, and edge in AI inferencing. If data centers maintain their rapid investment pace in AI hardware, AMD could surpass its competitor. However, AMD's lower valuation provides some protection if data center spending on GPUs slows down, while its diverse product portfolio could ensure strong growth in other chip categories, such as CPUs for PCs.
Sources:
[1] Bianco, J., & Hines, D. (2023, January 5). Nvidia bumps up guidance as AI demand boosts earnings. Retrieved from https://www.reuters.com/technology/nvidia-bins-up-guidance-ai-demand-boosts-earnings-2023-01-05/
[2] Kang, J., & Hu, S. (2023, February 17). China uses local AI to cut reliance on Western technology. Retrieved fromhttps://www.reuters.com/technology/china-uses-local-ai-cut-reliance-western-technology-2023-02-17/
[3] Benzinga. (2023, February 17). Advances and setbacks in AI chip development. Retrieved from https://benzinga.com/news/23/02/22119693/advances-and-setbacks-in-ai-chip-development
[4] Hyun, S., & Zhang, H. (2023, February 21). Chip demand support from data center sales could wane in 2023: Analysts. Retrieved from https://www.reuters.com/technology/chip-demand-support-data-center-sales-could-wane-2023-02-21/
[5] Del Rey, M. (2023, February 21). US considerations for chip exports to China. Retrieved from https://www.reuters.com/technology/exclusive-us-mulls-curbs-chip-exports-china-curb-risk-trade-flare-ups-2023-02-21/
Given the uncertainty surrounding the sustainability of data center spending trends, some investors might prefer to diversify their portfolio and consider investing in companies with lower reliance on data center GPU revenue, such as Advanced Micro Devices (AMD). Furthermore, the potential for Chinese deep learning companies to optimize their spending and challenge Nvidia's market dominance in AI chips could pose another risk to Nvidia's financial performance.
