It is almost impossible to read or listen to anything even remotely related to artificial intelligence (AI). not find a reference to Nvidia. The company’s graphics processing unit (GPU) chipsets are perhaps the most important piece of architecture used in generative AI.
Don’t you believe me? Industry research shows that Nvidia had 98% of GPU shipments over the past two years; Meanwhile, Jon Peddie Research estimates that Nvidia owns 88% of the GPU market. With a statistic like this, is it fair to say that Nvidia is the best AI option out there? Maybe.
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But considering Nvidia’s stock is up more than 800% in the last two years, I’m inclined to think the music will slow down at some point. Below I’m going to outline two AI capabilities that I think will break out in the coming years and give Nvidia a run for its money. Let’s dig in!
The first company on my list of the best AI stocks is Advanced micro devices (NASDAQ: AMD). Over the past few years, AMD has been regularly compared to Nvidia – a comparison that I don’t think is exactly apples-to-apples.
Since the start of the AI boom, Nvidia’s main source of growth has come from its H100 and H200 GPUs. As I mentioned above, Nvidia’s one-two punch GPU architecture has helped the company capture almost the entire market. While Nvidia’s computing and networking products are indeed quite powerful, one thing that also helped the company gain such a huge lead in the market was a lack of competition.
AMD has been quietly building its own GPU empire over the past year, but it’s not nearly as big as Nvidia’s. In my view, that could change quickly. AMD’s answer to Nvidia’s H100 and H200 GPU combination is its own chip accelerator called MI300. When the MI300 launched earlier this year, AMD management was targeting sales of 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 track for $5 billion in revenue this year.
The best part about this is that many of AMD’s major customers adopting the MI300 architecture are also Nvidia customers. When you add in the fact that more than $1 trillion could be spent on AI infrastructure in the coming years, AMD appears well-positioned to continue capturing incremental market share as it scales up its data center GPU business.
But despite the positive story, AMD stock doesn’t seem to be getting much love. Currently, AMD shares trade at a price-to-earnings (P/E) ratio of 27.1 – much lower than Nvidia’s price-to-earnings 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 will outpace Nvidia by any means, I do think AMD has a chance 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 indicates that investors are discounting the company’s future growth prospects. To me, AMD stock looks reasonable at these levels, and I think it’s an attractive buy for investors with a long-term horizon.
Next on my list is one of Nvidia’s peers in the “Magnificent Seven”, Amazon (NASDAQ: AMZN). While Amazon is best known for its e-commerce marketplace, the company is also a dominant force in cloud computing. Amazon Web Services (AWS) is on track to generate more than $100 billion in revenue this year. What’s even better is that AWS’s operating profits are rising even faster than revenue.
This dynamic has provided Amazon with tens of billions in free cash flow and a balance sheet with $88 billion in cash and equivalents. While this is encouraging, I think the party has only just begun. Amazon is aggressively deploying its profits toward a number of capital investments (capex), namely billions of dollars in data center infrastructure projects along with building its own internal training and inferencing chips.
That’s right, Amazon builds its own chips. Frankly, I think this is a development that gets very little attention, and has become completely overshadowed by Nvidia’s story. Along the same lines as AMD, I think Amazon’s pursuit of the chip market could become a long-term headwind for Nvidia. As more GPU architecture comes to market, it’s reasonable to assume that Nvidia’s grip on top-tier pricing power will weaken, resulting in a slowdown in sales and profit margins.
AI represents a lucrative opportunity for Amazon to further strengthen its various business segments, and yet its valuation suggests this opportunity isn’t really baked into the company’s prospects.
I think AI will help Amazon become an even more efficient and profitable company 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 AI, and one that is trading at a bargain to pass up now.
If our analyst team has a stock tip, it could be worth listening to. After all, Stock Advisors the total average return is 908% – a market-shattering outperformance compared to 174% for the S&P 500.*
They just revealed what they believe to be the 10 best stocks for investors to buy now… and Advanced micro devices made the list, but there are nine other stocks you might be overlooking.
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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 at Amazon and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Amazon, and Nvidia. The Motley Fool has a disclosure policy.
Here are my best artificial intelligence (AI) stocks to buy right now (hint: Nvidia isn’t on the list) was originally published by The Motley Fool
