The Battle for AI Chip Dominance: Nvidia vs. AMD

Nvidia Corp. has long been the leader in the market for AI chips, powering the artificial-intelligence frenzy. However, Advanced Micro Devices Inc. (AMD) is now making a strong push to claim a larger share of this lucrative pie.

Recently, AMD received a significant endorsement from none other than Tesla Inc. CEO Elon Musk. In response to a post about his spending plans for Nvidia, Musk revealed that Tesla also had plans to purchase chips from AMD.

Industry analysts, such as Susquehanna's Chris Rolland, have noticed an increasing enthusiasm for AMD's MI300 AI accelerator. In fact, Rolland suggests that AMD's previous revenue projections for graphics processing units in data centers need to be revised upwards. While AMD initially projected revenue exceeding $2 billion by 2024, Rolland believes that the new estimate should be "at least" over $3 billion.

However, other investors have even higher expectations for AMD, with some predicting revenues of $6 billion or more. Rolland acknowledges that much of the upside potential from the MI300 AI accelerator is already factored into the stock's current value.

Solidifying AMD's Report

The forthcoming report from AMD will put the spotlight on the "narrative and update" surrounding the highly anticipated M1300. This will likely be the driving force behind AMD's report, according to Rolland. While he expects the latest quarter's results to be generally in line with expectations, he predicts a slightly disappointing outlook for the current quarter.

Vivek Arya, an analyst at BofA Securities, shares a similar perspective. He anticipates that AMD's management will raise their expectations for the MI300 AI accelerator during their call, aligning it more closely with consensus estimates in the range of $3-$3.5 billion by 2024.

Overall, the battle between Nvidia and AMD for AI chip dominance continues to intensify, with AMD gaining significant traction in the market. As the industry eagerly awaits AMD's upcoming report, all eyes will be on the performance and potential of their highly regarded MI300 AI accelerator.

Read: Missed the boat on AMD's stock surge? Why this analyst says you're not too late.

Read: Intel's stock sees worst plunge in more than three years.

AMD's Accelerator Market Share and Earnings Projection

In an analysis, it has been estimated that for every 1% share of the accelerator market that AMD holds, the company could potentially earn an additional 16 cents per share in 2025. However, AMD faces strong competition from incumbents like Nvidia and customer chip partners such as Broadcom Inc. and Marvell Technology Inc. Despite this, there is a possibility for AMD's market share to increase from its current level to anywhere between 5-10%.

Recently, an analyst from Bernstein raised the price objective of AMD shares to $195 from $165, showcasing a positive outlook for the company. The analyst, Stacy Rasgon, remarked that AMD has been experiencing two different narratives simultaneously, and this dichotomy may persist.

Rasgon further mentioned that although AMD's guidance was soft throughout last year and the numbers took a hit, the stock price more than doubled due to its association with the growing AI narrative. According to Rasgon, this strategy might continue to work for the company in the short term. He believes that while the core fundamentals could still be uncertain, the AI narrative is likely to support AMD. Additionally, Rasgon commended AMD for setting realistic growth expectations by suggesting "more than $2B," which allows room for upward revisions.

It is worth noting that among AI semiconductor stocks, AMD is considered to be the most expensive with a forward earnings per share multiple of around 46 times. Rasgon reiterated his target price of $120 for the stock, reflecting his cautious stance.

Analysts, on average, expect AMD to report adjusted earnings per share of 77 cents for the quarter with revenue of $6.1 billion. This represents a 9% year-over-year growth in the top line. The consensus estimate predicts a 39% increase in data-center revenue to $2.3 billion and a 71% rise in client revenue to $1.5 billion. However, analysts anticipate a 25% decline in gaming revenue to $1.2 billion, and a 24% decrease in embedded revenue to $1.1 billion.

Overall, AMD's performance in the accelerator market and its earnings potential look promising. Yet, challenges from established competitors and customer chip partners should not be overlooked. The company's association with the AI narrative has proven successful thus far, but it remains to be seen how the core fundamentals will align with this narrative in the long run.