Artificial intelligence (AI) has turned out to be a tailwind for semiconductor companies in 2023, which isn't surprising as the growing proliferation of this technology has turned around the fortunes of quite a few chipmakers that were earlier facing a downturn on account of weak sales of personal computers (PCs), smartphones, and other consumer-electronic devices.
After all, chips are the crucial building blocks that train complex and large AI models in data centers. They also help run inferencing applications so that the trained models can be put into use for making predictions based on new data fed into the model. The central role that semiconductors are playing in AI deployment explains why the PHLX Semiconductor Sector index has clocked terrific gains of 43% in 2023.
The good part is that this rally seems sustainable for a long time, as the AI chip market is expected to grow at an annual pace of 37% through 2031, generating a whopping $263 billion in annual revenue. Advanced Micro Devices (AMD 0.22%) and Intel (INTC -0.53%) are two chipmakers that are trying to make the most of this lucrative market. But which one of these two semiconductor stocks should you be putting your money on to take advantage of the AI gravy train? Let's find out.
The case for AMD
AMD has been late to the AI chip party despite being a manufacturer of graphics cards, which have been in explosive demand because of their ability to train AI models. Nvidia has run away with this market with a share that reportedly ranges between 80% and 95% as per various estimates.
As a result, Nvidia is about to deliver a massive turnaround with eye-popping revenue and earnings growth when it releases its quarterly results next week. The company was earlier struggling to grow its top and bottom lines on account of a weak PC market, which dented the demand for its gaming GPUs (graphics processing units).
AMD's latest quarterly results indicate that it may be about to witness a similar turnaround. The company's second-quarter 2023 revenue was down 18% year over year to $5.4 billion, while adjusted earnings fell 45% to $0.58 per share. The company is still reeling under the impact of weak PC sales, which was evident from a 54% year-over-year decline in the PC processor business to $998 million.
However, AMD's guidance for the current quarter indicates that better days lie ahead for the company. It anticipates $5.7 billion in revenue in Q3, which would be a slight improvement over the prior-year period's revenue of $5.6 billion. What's more, AMD is expected to return to solid top-line growth from 2024, with analysts anticipating a 21% increase in revenue next year to $27.5 billion as compared to this year's 3.3% decline.
AI is likely to play a central role in AMD's highly improved financial performance next year. That's because the company's AI chips are already witnessing solid traction among customers. AMD CEO Lisa Su said on the latest earnings conference call that: "AI cluster engagements grew by more than seven times sequentially as multiple customers initiated or expanded programs supporting future deployments of Instinct MI250 and MI300 hardware and software at scale."
At the same time, AMD is reportedly looking to make the most of the huge demand for AI chips in China. The chipmaker estimates that AI chips could present a $150 billion revenue opportunity for it by 2027. Given that Nvidia alone has been unable to satisfy the demand for AI chips, leading to long wait times and a spike in prices, there is an opportunity for AMD to corner a slice of this market. It won't be surprising to see that happen considering AMD's product-development efforts.
The case for Intel
Just like AMD, the PC market's downturn has dealt a heavy blow to Intel. The company's revenue was down 15% year over year in the second quarter to $12.9 billion, while adjusted earnings fell 54% to $0.13 per share. But, unlike AMD, Chipzilla's Q3 guidance doesn't point toward a significant improvement in its fortunes.
Intel has guided for $13.4 billion in revenue in the current quarter, which would be a 12% decline over the prior-year period's reading of $15.3 billion. But then, it is worth noting that the company has already started building a nice revenue pipeline from AI that could play a key role in its revival.
For instance, Intel points out that at least 25% of its fourth-generation Xeon server processors are now being purchased for running AI workloads. Intel has equipped these server CPUs (central processing units) with AI engines that can reportedly run training and inferencing tasks at 10 times the pace of its previous-generation processors.
Meanwhile, Intel's Gaudi2 AI accelerator, which is aimed at both AI training and inferencing, has also built a solid customer base that includes the likes of Hugging Face, Stability AI, and Amazon Web Services (AWS). Intel markets this chip as an alternative to Nvidia's A100 data center GPU, which has been used to train ChatGPT, claiming that it can deliver twice the training throughput of its competitor and reduce operating costs simultaneously.
Not surprisingly, the Gaudi AI accelerator has helped Intel build an AI-specific revenue pipeline of more than $1 billion through 2024. More importantly, Intel expects a rapid increase in its AI revenue pipeline thanks to the growing adoption of Gaudi and other AI-focused processors. This could be one of the key reasons why analysts are anticipating a big turnaround in Intel's fortunes from next year following a sharp decline in its revenue and earnings in 2023.
More specifically, Intel's revenue is expected to drop almost 17% in 2023 to $52.4 billion. Adjusted earnings could decline to $0.62 per share from $1.84 per share in the year-ago period. But the picture is expected to change from next year.
INTC Revenue Estimates for Next Fiscal Year data by YCharts.
The verdict
Both Intel and AMD are in the early innings of their AI journey. However, Intel seems to have the upper hand now as its AI-focused chips are already being purchased by customers and have given the company future revenue visibility. AMD's AI chips, on the other hand, are currently sampling with customers, and they are expected to go into production by the end of the year.
This puts Intel in a more advantageous position right now. Also, Intel is trading at a much cheaper 2.7 times sales right now compared to AMD's price-to-sales (P/S) ratio of 8.3. So, investors looking for an AI stock that's trading at a reasonable valuation right now can consider buying Intel as it could win big from this technology in the long run and control a huge chunk of the server processor market, an area that's getting a big shot in the arm thanks to AI.
