Founded by brothers Tom and David Gardner in 1993, The Motley Fool is dedicated to making the world smarter, happier, and richer. Through various platforms such as our website, podcasts, books, newspaper column, radio show, and premium investing services, we aim to help millions of individuals achieve financial freedom. While reading this free article, please note that the opinions expressed may differ from those provided by The Motley Fool's Premium Investing Services. To gain instant access to our top analyst recommendations, in-depth research, investing resources, and more, we encourage you to become a Motley Fool member today. Learn More. Graphics Processing Units (GPUs) play a crucial role in any application involving artificial intelligence (AI). Working in conjunction with numerous other GPUs, this hardware facilitates the computational tasks required for training AI models. When discussing GPUs, Nvidia (NVDA 2. 21%) is often the primary focus, but it's worth highlighting that Advanced Micro Devices (AMD 3. 02%) also offers excellent GPU products and other essential components for building data centers. Although Nvidia holds the dominant position in the GPU market, its stock currently carries a high price tag. On the other hand, AMD's stock is more reasonably valued and stands to benefit from the AI boom as well. Is AMD the next standout AI investment?Let's delve into that. AMD's business is more diverse than Nvidia's, encompassing a range of products such as embedded processors, central processing units (CPUs), data processing units (DPUs), and more. This breadth exposes AMD to the consumer market to a greater extent than Nvidia. Nvidia consolidates its consumer segment under the gaming umbrella, which contributed $2. 2 billion and accounted for 31% of its total revenue in the first quarter of fiscal year 2024 (ended April 30). However, this segment experienced a 38% year-on-year decline. In terms of AMD's consumer-facing revenue, it consists of client revenue (AMD CPUs used in PCs) and gaming revenue (GPUs for gaming laptops and consoles). While client revenue suffered a significant drop to $739 million from $2. 1 billion in 2022 (a decline of 65%), gaming revenue only decreased by 6% in Q1. Together, these two categories comprised 47% of AMD's Q1 2023 revenue, a drop from 68% in Q1 2022. Consequently, AMD becomes even more reliant on the consumer segment when the PC market experiences weakness. The concentration in consumer-related earnings has implications for AMD's exposure to AI. While both companies generate AI revenue through their data center product lines, the segment also incorporates non-AI-related revenue. That being said, Nvidia's data center revenue increased by 14% year-on-year and constituted 60% of its overall revenue, compared to AMD's relatively flat revenue growth and 24% concentration in the data center space. Therefore, Nvidia possesses higher leverage across the entire spectrum of data center operations.

Does this imply a disadvantage for AMD?Not necessarily. Nvidia's stock price has been driven to extremely high levels due to AI hype, while AMD has not experienced the same surge. If AMD can gradually benefit from AI advancements and investors can acquire its stock at a lower price, it may present a more attractive AI investment option, as it won't be an all-or-nothing approach. It's worth noting that, when considering various valuation metrics, AMD's stock is considerably cheaper than Nvidia's. Therefore, it is questionable whether Nvidia's 6-times premium on its price-to-sales (P/S) ratio is justified by its margin profile being significantly better. While AMD may have a stronger focus on consumer-facing products, it will still reap benefits from the AI revolution. However, if the AI trend proves to be short-lived, AMD's stock is not as susceptible to a major downturn due to excessively high valuation as Nvidia's. Nevertheless, AMD's valuation has risen substantially since AI emerged as a prominent investment theme and is currently at the higher end of its typical range. Consequently, while AMD holds potential as a solid AI investment, do not expect its stock to skyrocket in a similar manner to Nvidia. Investors will gain further insights into AMD's current state on August 1st, and once the impact of AI on its business becomes clearer, they can consider adding AMD shares to their portfolios. However, until the consumer market fully recovers, AMD is likely to continue experiencing lackluster results. Keithen Drury does not hold any positions in the mentioned stocks. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. For more information, please refer to The Motley Fool's disclosure policy. Calculated based on the average return of all stock recommendations since the inception of the Stock Advisor service in February 2002. Returns accurate as of July 28, 2023. Discounted offers are exclusively available to new members. The list price for Stock Advisor is $199 per year. Calculated based on the time-weighted return since 2002. Volatility profiles determined by calculating the standard deviation of service investment returns over the trailing three years.