Which one in every of these chipmakers ought to traders purchase now to finest profit from the rising adoption of AI?
As the unreal intelligence (AI) revolution continues to realize steam, chipmakers Superior Micro Units (AMD -0.86%) and Qualcomm (QCOM -0.40%) have skilled broadly differing fortunes on the inventory market in 2024 up to now. Whereas one is outperforming the PHLX Semiconductor Sector index properly, the opposite one is lagging.
Extra particularly, Qualcomm inventory is up 45% up to now this yr, which is nicely above the 28% beneficial properties for the PHLX Semiconductor Sector index, as traders are being attentive to the corporate’s sturdy place within the AI chip area of interest. AMD, in the meantime, gained simply 9% in 2024 regardless of beginning the yr on a constructive observe, as its enterprise is not getting as robust a lift from AI as Wall Road analysts had been anticipating.
Does this imply that Qualcomm is the higher AI inventory of the 2 to purchase now? Or will AMD’s current product improvement strikes assist it land a considerably greater share of the profitable AI chip market and switch its fortunes round?
The case for AMD
The marketplace for chips utilized in AI servers is rising quickly, however AMD got here late to the celebration. Nvidia is operating away with this market with an estimated share of 90%. This explains why Nvidia’s knowledge heart income within the first quarter stood at $22.6 billion, up a whopping 427% yr over yr.
AMD generated simply $2.3 billion in income from knowledge heart chips within the quarter, although it’s price noting that this was up 80% from the year-ago interval. AMD credited this spectacular development to elevated gross sales of its Intuition line of knowledge heart graphics playing cards, that are focused at AI workloads.
Additionally, when it launched its Q1 numbers in April, AMD elevated its 2024 forecast for AI-related knowledge heart graphics processing unit (GPU) income to $4 billion, up from the sooner estimate of $3.5 billion it issued in January. Three months previous to that, AMD was forecasting its 2024 knowledge heart GPU income would land at $2 billion. So, the corporate has doubled its income expectations from this market within the house of simply six months.
Nonetheless, it appears to be like like traders had been anticipating even greater numbers from AMD. That is not shocking, because it’s buying and selling at 12 instances gross sales proper now, which is larger than the U.S. tech sector’s common price-to-sales ratio of seven.6. The chipmaker’s income forecast of $5.7 billion for the second quarter would quantity to a year-over-year enhance of simply 6%, which is not ok to justify its wealthy valuation.
However then, it will not be shocking to see AMD elevating its AI income steering additional because the yr progresses. The corporate stands to realize from the rising AI chip manufacturing capability of its foundry accomplice. Moreover, AMD is seeking to seize an even bigger share of the AI chip market by launching new chips.
The corporate not too long ago unveiled its MI325X knowledge heart GPU, which it says is 30% extra highly effective than rival Nvidia’s flagship Hopper architecture-based H200 chip. Additionally, AMD has now determined to launch a brand new household of AI accelerators yearly in order that it may well develop into extra aggressive.
On the similar time, the rising adoption of AI-enabled private computer systems (PCs) is now driving strong development in one other of AMD’s key enterprise segments. Its income from the shopper phase, which incorporates gross sales of central processing items (CPUs) utilized in desktops and laptops, elevated a strong 85% yr over yr to $1.4 billion within the first quarter.
AMD administration factors out that it’s going to have an enormous vary of AI-enabled PCs powered by its processors by the top of the yr. This could permit the corporate to capitalize on a profitable development alternative; AI-enabled PCs are anticipated to account for 60% of PCs shipped by 2027 as in comparison with 19% this yr, in accordance with market analysis agency Statista.
All this means that there’s a good likelihood that AMD’s AI-related enterprise will decide up, which might be the explanation why analysts predict its prime line to leap 28% in 2025 following a forecast achieve of 13% in 2024. So, the potential for AMD’s fortunes turning round due to AI can’t be dominated out.
The case for Qualcomm
Qualcomm, too, is sitting on a secular development alternative — in its case, due to AI within the smartphone market. Smartphone gross sales declined final yr amid weak demand, however the introduction of AI-enabled smartphones is anticipated to set off a turnaround on this market, with IDC forecasting development of 4% this yr.
Counterpoint Analysis estimates that 100 million AI smartphones may very well be shipped this yr. Even higher, generative AI smartphone shipments are anticipated to see an annualized development fee of 83% by way of 2027, once they would hit 522 million items in shipments. The great half is that Qualcomm has already began capitalizing on this house. Its Snapdragon processors are powering on-device AI capabilities in Samsung’s flagship Galaxy smartphones.
Moreover, Qualcomm’s income from Chinese language smartphone producers elevated 40% yr over yr within the first half of 2024. Extra importantly, Qualcomm is pushing the envelope within the AI smartphone market by launching extra chips that may permit it to increase past top-tier smartphones and goal the mid-range smartphone market as nicely. Not surprisingly, Counterpoint Analysis expects Qualcomm to dominate the marketplace for AI smartphone chips with a market share of greater than 80% over the following couple of years.
On the similar time, Qualcomm has set its sights on the AI PC market. Throughout its Could earnings convention name, CFO Akash Palkhiwala stated that each one the main PC producers are going to launch “next-generation AI PCs powered by our Snapdragon X Elite and X Plus platforms” beginning in mid-2024. Microsoft already introduced PCs powered by Qualcomm chips. Consequently, there’s a good likelihood that Qualcomm’s development is ready to speed up.
The corporate’s income within the second quarter of its fiscal 2024 (which ended on March 24) was nearly flat yr over yr at $9.4 billion. Analysts, nonetheless, predict the corporate to complete its fiscal yr with a 7.2% enhance in income to $38.4 billion. In fiscal 2025, Qualcomm’s prime line is forecast to leap by simply over 10% to $42.3 billion.
These estimates, nonetheless, may very well be revised larger as soon as the adoption of AI-enabled smartphones and PCs begins gaining crucial mass, suggesting that Qualcomm may stay a prime AI inventory sooner or later.
The decision
Each AMD and Qualcomm are on observe to make the most of profitable AI niches. However whereas AMD is struggling to realize market share towards its greater rival in chips for AI servers, Qualcomm is the dominant participant within the smartphone chip market.
Additionally, AMD’s steep gross sales a number of of 12 and trailing earnings a number of of 230 make the inventory an costly funding proper now with respect to the expansion that it has been delivering. Its ahead earnings a number of of 49 can be fairly wealthy.
Qualcomm, alternatively, trades at simply 6.4 instances gross sales. It has a trailing earnings a number of of 27, and its ahead earnings a number of of 18 factors towards the expectation of a pleasant bounce in its backside line. So traders trying so as to add an AI inventory to their portfolios could also be tempted to purchase Qualcomm over AMD, on condition that it’s approach cheaper and enjoys a dominant place within the fast-growing AI smartphone house.
