Advanced Micro Devices (AMD) has witnessed an impressive 130% surge in shares over the past year, driven by the booming artificial intelligence (AI) sector. The launch of OpenAI’s ChatGPT in November 2022 propelled chip stocks, including AMD, as the market expressed optimism in companies developing hardware crucial for AI models.
Despite holding the second-largest market share in graphics processing units (GPUs) and plans to release a new AI chip this year, AMD’s current valuation may raise concerns. The forward price-to-earnings ratio (P/E) has increased by 58% since last January, reaching a high 45, while its free cash flow has dropped by 47% to just over $1 billion during the same period. Comparatively, other AI stocks offer better value and financial stability.
This chart illustrates that AMD boasts the second-highest forward P/E among notable AI firms, indicating potential overvaluation when compared to companies like Microsoft and Intel. As a result, investors may find it prudent to explore alternative AI stocks while waiting for a more favorable entry point for AMD.
1. Microsoft
Microsoft emerged as a formidable force in AI through strategic investments in OpenAI, gaining access to advanced AI models. Leveraging OpenAI’s technology, Microsoft has integrated AI features across its product lineup, introducing new tools to its Azure cloud platform, enhancing Bing with ChatGPT, and boosting productivity in its Office software suite.
In 2023, Microsoft monetized its AI offerings by launching Copilot, an AI assistant, through its Microsoft 365 subscription service. Priced at $30 per month as an add-on to a 365 membership, Copilot showcases generative capabilities, including drafting documents, creating PowerPoint presentations, and generating data visualizations in Excel.
Microsoft’s robust AI potential has propelled its stock to a 64% year-over-year surge, making it the world’s most valuable company. With over $62 billion in free cash flow in 2023, Microsoft has the financial capacity to continue leading in AI development, making it an attractive investment with a significantly lower forward P/E than AMD.
2. Intel
Intel, despite a recent 13% decline in shares following its Q4 2023 earnings release, remains a key player in the AI landscape. The company posted a 10% year-over-year revenue growth, fueled by gains in the recovering PC market. However, weak guidance, especially for Q1 2024 earnings and revenue, has impacted Intel’s stock.
The chip market’s dynamics have shifted with the AI boom, emphasizing the demand for GPUs over CPUs. Intel’s historical dominance in CPUs reflects in its weak guidance. Despite the recent stock dip, Intel’s long-term position in the AI market and its commitment to innovation make it an intriguing option for investors seeking exposure to AI.
In summary, while AMD holds potential in the AI sector, exploring alternatives like Microsoft and Intel may offer investors better value and financial stability in 2024.