Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) is a potential major player in the artificial intelligence (AI) market. The company has been developing its own chatbot, Gemini, and is also looking to enhance its existing products and services with AI capabilities.
But it also has risks. The biggest risk is that chatbots could ultimately reduce the traffic that goes to Google to find answers to questions. After losing a major antitrust case over Google Search, there’s also the risk that regulators will choose to break up Alphabet’s business or at least change the way it operates. The reliance on the advertising market means there could be a lot of volatility if a recession hits or if competition increases.
I used to be more optimistic about Alphabet’s growth prospects in AI. However, given these risks, I think there’s a much better option for AI investors to consider today: Advanced micro devices (NASDAQ: AMD)better known as AMD.
AMD’s businesses are less complex and may have better growth prospects
Many companies are spending feverishly on AI these days. From upgrading their IT infrastructure to buying chips, AI spending is skyrocketing. Even Alphabet CEO Sundar Pichai recently acknowledged that the company might be investing too aggressively in AI, saying, “When we go through a curve like this, the risk of underinvestment is much greater than the risk of overinvestment for us here.”
Alphabet could benefit from AI spending in the future, but today, most of its revenue comes from advertising. In the most recent quarter, which ended June 30, total ad revenue was $64.6 billion, up 11% year over year. It accounted for 76% of the company’s total revenue ($84.7 billion). That ad revenue comes primarily from YouTube and Google Search. But AI chatbots could simplify searches for humans, potentially giving users less reason to search on Google or YouTube.
AMD, meanwhile, has a more direct path to AI-related growth. The company expects to generate $4 billion in AI chip sales this year, recently raising its forecast by $500 million. Its chips could be in high demand as tech companies look for cheaper alternatives to Nvidia‘s products. AMD is a bit late to the game, but the company plans to launch new AI chips in the coming years, including the MI350 in 2025, followed by the MI400 the following year.
The company’s growth numbers haven’t been quite as exciting, with net revenue up just 6% in the first six months of 2024, to $11.3 billion. But the company expects revenue growth of 16% for the current quarter. CEO Lisa Su is bullish on more AI-driven growth: “Our AI business continued to accelerate and we are well-positioned to deliver strong revenue growth in the second half of the year, led by demand for Instinct, EPYC and Ryzen processors.”
As demand for AI chips remains strong, AMD could be well positioned to capitalize on these opportunities.
These companies could go in very different directions
Alphabet is doing well right now, growing more impressively than AMD. But the question is how long that will last. Not only is AMD’s business in overdrive, but Alphabet’s growth prospects could take a hit, especially if regulators break up the company.
The company’s growth could also slow if the advertising market weakens (due to a recession) or if advertisers simply have more options. Social media site Redditfor example, could pose a significant threat in the not-too-distant future as it grows its advertising business and allows advertisers to target users based on topics and interests rather than data. It’s a potentially understated risk that exacerbates Alphabet’s exposure and dependency on the advertising market.
If you’re bullish on AI, choose AMD over Alphabet
AMD is a better AI stock to own. It’s more likely to benefit directly from a surge in AI-related spending with chips that can help companies develop next-gen models and technologies. While its growth numbers haven’t been impressive lately, that could change quickly as it rolls out new AI chips.
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Forget Alphabet: This Is the Artificial Intelligence Stock I’d Buy Right Now was originally published by The Motley Fool
