AMD’s Latest GPUs Should Scare Nvidia

Summary:

• AMD’s turnaround story includes hiring Jim Keller, switching to TSMC, and capitalizing on Intel’s missteps, leading to a significant market position.
• AMD’s new GPUs are competitive with Nvidia’s upcoming Blackwell, potentially impacting Nvidia’s margins while boosting AMD’s performance.
• The primary risk is AMD’s lofty valuation and the potential for customers to develop their own CPUs/GPUs, affecting long-term AI demand.
• Despite risks, AMD’s market cap is still less than 10% of Nvidia’s, presenting a lower risk profile for investors.

There was a time, less than a decade ago, where AMD (NASDAQ:AMD) was flirting with whether it would be around anymore as its share price dropped below $2/share. Then the company hired legendary chip designer Jim Keller, switched to TSMC for fabrication, benefited from Intel’s (INTC) stumbles, and quickly grew to becoming a powerful competitor in the CPU world. Today it’s worth double Intel.

As we’ll see throughout this article, the company’s latest GPUs are surprisingly competitive with Nvidia (NVDA). At minimum, that could push down Nvidia’s legendary margins on Blackwell, while enabling strong performance for AMD.

AMD New GPUs vs. Blackwell

The first order of business is to compare AMD’s new accelerator GPUs with Nvidia’s to be launched, Blackwell.

There are some key things to note given that Nvidia shares GB200 specs as a dual Blackwell GPU package. Another important thing that’s missing is the 1200W power draw of each Blackwell GPU. The MI325x is expected to have 1.3x the performance of H100 with 1.3 PF (petaflops) of FP16 performance. For perspective, AMD’s numbers say flops with sparsity = ~0.5x flops without.

So Nvidia has 2 Blackwell GPUs into a single package, producing 5 real PFLOPS of FP16 (we’re going to generous assume the Grace CPU is providing no benefit). That puts each GPU at 2.5 real PFLOPs or roughly 1.9x AMD’s new MI325x. So that’s the real metric (190% better performance for Blackwell). MI325x power draw is 1000W, so Nvidia performance is 1.6x per watt.

Now that might seem impressive off of the bat, and it is. However, with Nvidia’s margins at 75% on its server GPU business, there are plenty of profitable prices AMD can operate at that would undercut Nvidia’s margins and offer cheaper performance. This is the huge opportunity for AMD in our view, not beating Nvidia on raw volume, but undercutting Nvidia’s massive margins.

It’s also worth noting that AMD is working to balance things out by offering competitive memory offerings. The company’s MI325x will have 256 gB of HBM3E versus 192 gB for B200. For high memory required applications, this is a strong offering that beats Nvidia, albeit at a cost to AMD (though one that it can afford).

It’s the same strategy that enabled AMD to chip away at Nvidia. Another point worth highlighting is that AMD has also moved to a yearly cadence, and it’s focusing on inference where it’ll be easier to chip away at Nvidia’s offerings and where it’s already integrated with the major operators. The company’s CDNA4 is expected to see massive performance improvements.

Supported by 3nm from TSMC, the new cutting-edge node, this shows AMD’s continued strength.

CUDA vs. AMD

One counterargument we want to highlight that we consistently see when we talk about Nvidia’s competition is that “Nvidia isn’t all hardware (HW), it also has a leading software (SW) platform, CUDA”.

However, it’s worth highlighting that Nvidia’s largest customers are just a handful of companies, companies that are all giants of SW with SW operations much bigger than AMD and Nvidia. Many of these companies also have their own leading AI SW platforms, and on top of that, prefer to use their in-house optimized SW.

However, what’s key from the statements above, is that while many smaller companies might prefer CUDA, all of the largest Nvidia customers, and the biggest wins for AMD are already working with AMD GPUs and MI300X supporting live traffic. That integration highlights how Nvidia’s SW isn’t a moat for their largest customers.

AMD Strong CPU Offerings

AMD has continued to ramp up its CPU offerings as it becomes more and more competitive.

Across the last 7 years, the company has managed to achieve 6x the core count and 10.9x the performance. Its CPUs having a mix of Zen5c (3nm) and Zen5 (4nm) cores shows how it’s releasing the first server CPUs on the 3nm node from TSMC, an industry first. For perspective, Nvidia’s Grace CPU node is on 4nm.

AMD’s strength has shown an ability to take market share from existing leader Intel. Building up a reputation in a B2B business like server processors is exceedingly slow, and the company, with its great products, needed years to chip away at Intel’s leadership. The company has built a wide platform of SKUs for its next gen CPUs and its release puts it at the forefront here.

We expect the company to continue to grow its market share here, supporting its overall business.

AMD Shareholder Returns

Putting this all together, AMD has the ability to drive hefty returns for interested shareholders.

The company in the most recent quarter had non-GAAP net income annualized at ~$4.5 billion, giving the company a P/E ~50. That’s lofty, and it’s a valuation the company will need to grow into. However, the company has two sources of growth, not only overall market growth, but taking market share from competitors such as Nvidia that are much bigger.

More importantly, the company retains an incredibly strong EPYC CPU business it can grow with. The company doesn’t have any substantial debt, and has the ability to grow and generate shareholder returns. Versus an overvalued Nvidia, we see this company as making an interesting pair trade for those investors interested in overall AI growth.

Thesis Risk

The largest risk to our thesis is what we discussed in our last article on AMD, that the company has a lofty valuation that relies on future growth. The company has some of the same risks that we discussed in our latest article on Nvidia, namely their largest customers building their own CPUs and GPUs, and the long-term viability of artificial intelligence demand.

Any of these risks could hurt AMD’s ability to justify its valuation, however, at <10% of Nvidia’s market cap the risk here is much lower.

Conclusion

The market didn’t react well to AMD’s announcement of its new processors and GPUs, but the company has launched some strong offerings. This is especially true in the EPYC space, where the company has less competition. The company is ramping up its offerings, and given Nvidia’s enormous margins, we expect it to be competitive too.

More importantly, AMD is priced at a much lower valuation than Nvidia, with a market cap of <10% of its competitor. That makes the company dramatically less reliant on the growth of AI to justify its future growth, simply stealing market share from Nvidia will be sufficient. That could make an interesting pair trade and help drive returns.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

We are net short Nvidia.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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