Nvidia And AMD Paint The Same Growth Picture
Contributor since 2014 / 676 Followers
Summary:
- Advanced Micro Devices CEO Lisa Su recently provided concrete estimates for the AI accelerator market.
- These estimates broadly align with Nvidia Corporation CEO Jensen Huang’s recent comments.
- I consider the implications of AMD’s new estimates for Nvidia and AMD’s valuation and growth.
Just_Super
On Tuesday, Advanced Micro Devices, Inc. (NASDAQ:AMD) hosted its “Data Center and AI Technology Premier.” Some investors (including me) may have been a little disappointed, as AMD provided less information about its upcoming MI300 chips and associated partnerships than may have been hoped. However, a significant piece of information did emerge on a different front: AMD CEO Lisa Su, for the first time to my knowledge, provided concrete financial estimates about the expected size of the AI accelerator market.
Su’s claim that the market for AI chips will cross $150 billion by 2027 aligns with Nvidia Corporation (NASDAQ:NVDA) CEO Jensen Huang’s statements during Nvidia’s last earnings call about trillions of dollars of data center infrastructure being built or replaced in coming years. In my opinion, when Jensen Huang and Lisa Su both make similar statements—and even though the statements may seem wildly optimistic—we should take them very seriously. In this article, I discuss what it would mean for Nvidia and AMD valuations and growth if the two CEOs turn out to be right.
The Comments
In Nvidia’s last earnings call, CEO Jensen Huang offered a glimpse into the future market for AI chips. He stated:
The world’s $1 trillion data center is nearly populated entirely by CPUs today, and $1 trillion, $250 billion a year, it’s growing of course. But over the last four years, call it a $1 trillion worth of infrastructure installed. And it’s all completely based on CPUs and dumb NICs. It’s basically unaccelerated…. over the next four or five, ten years, most of that $1 trillion and then compensating adjusting for all the growth in data center still, it will be largely generative AI… and that’s training as well as inference.
During AMD’s recent AI event, CEO Lisa Su expressed a similar view about the AI chip market. She stated:
When we try to size it, we think about the data center AI accelerator TAM [total addressable market] growing from, you know, something like $30 billion this year—over 50% compound annual growth rate—to over $150 billion in 2027. And it may be higher, it may be lower, but what I can say for sure is it’s going to be a lot because there’s just tremendous, tremendous demand.
Although the two CEOs are discussing different metrics, their projections seem to roughly align: they both anticipate AI chips worth hundreds of billions of dollars being sold annually within a few years, with cumulative over a trillion dollars over the next several years. Su’s agreement carries great weight, because at least in my observation, Su tends to be more circumspect in her predictions and tends to avoid inflated promises. Her agreement with the enormous numbers floated by Huang should, therefore, be taken quite seriously.
The Implications
Let’s focus on Lisa Su’s projection, as it provides a more concrete estimate, to understand what both Nvidia and AMD are suggesting.
It is worth noting, first, that Su was referring only to data center AI accelerator TAM. Hence, when she estimates it at $30b this year, the vast majority of that is going to end up as revenue for Nvidia’s data center business. There is then another $120b up for grabs by 2027. All this is in addition to AMD and Nvidia’s other businesses.
Given the current landscape, it seems reasonable to expect a significant proportion of this $120 billion to end up with Nvidia and AMD, the current leaders in AI accelerators (although it is tricky to say with confidence how each of them will be doing relative to the other in 2027). Even with a conservative assumption that by 2027 a third of the market will be captured by other players (including Intel, various chip startups, and cloud providers with their own chips), that still leaves a whopping $80 billion for the Nvidia-AMD duo. If this scenario unfolds, we can expect massive growth for one or, more likely, both of these chipmakers.
Valuing the Nvidia-AMD Duo
Analysts estimate Nvidia’s revenue for this year at $42 billion and AMD’s at $23 billion, giving them a combined projected revenue of $65 billion. If growth in demand for AI chips adds another $80 billion to this total, the Nvidia-AMD duo could combine for a staggering $145 billion in revenue.
To put this into perspective, if Lisa Su’s projection is reasonable, then Nvidia and AMD combined would be in the same ballpark in 2027 as Microsoft Corporation (MSFT) is today. Microsoft posted revenue of $198 billion for fiscal 2022, compared to the $145 billion estimated for the Nvidia-AMD duo. Even gross margins would likely be similar. Microsoft reported 68% gross margins last year, compared to Nvidia at 56% and AMD at 51% (although Nvidia had a bad year, and had posted 64% the previous year). With high margins for AI chips, the chipmakers’ combined margins could more-or-less align with Microsoft’s if their revenues were to increase by $80 billion.
Of course, Microsoft is currently valued at about $2.5 trillion, whereas Nvidia and AMD only combine for about $1.2 trillion. This suggests significant growth potential for the chipmakers—AI accelerator revenue alone could potentially double their combined market capitalization by 2027 if they are treated similarly to Microsoft.
Hence, if we take Nvidia and AMD’s projections seriously, their current valuations are not unreasonable. There is substantial room for growth for one or, more likely, both of them. An additional $80 billion could significantly change both companies’ fortunes. For instance, if Nvidia captures 80% and AMD 20%, Nvidia’s revenue would be about 2.5x what it is today, and AMD’s would be about 1.7x. In this scenario, both firms would experience rapid growth.
Moreover, this projection is only accounting for upcoming growth in demand for AI accelerators. Each company has other healthy and growing businesses that could further expand their valuation by 2027. This further expands the upside. It, therefore, seems reasonable to conclude that both Nvidia and AMD are excellent companies that are likely to perform well in the coming years.
The simplest strategy might be to invest in both. This approach eliminates the need to predict the outcome of their competition, and diversifies one’s investment in AI chips.
Conclusion
There is still much to unfold with the AI revolution, but Nvidia Corporation and AMD are painting a similar picture of tremendous growth in coming years. If we take their projections seriously—and there are good reasons to do so—then there is significant room for rapid growth still to come. Investors should not be deterred by the high multiples.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMD, NVDA 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.
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