There’s been some great news for Advanced Micro Devices (NASDAQ:AMD) stock. The ability to train huge databases and create stories, sound, videos, or software with AI is just starting to change the world.
It takes a lot more processing power to handle AI than the last decade’s clouds and PCs were built for. There’s a rising tide of demand. Scientists, engineers and businesses are hungry for the power of its Epyc CPU and Radeon GPU chips. But is that all there is?
A Closer Look at AMD Stock
AMD’s data center revenue was flat, while that of Nvidia surged 31%. Where AMD stock shone was in laptop chips, the Ryzen 7000 series, whose sales rose 41%. Revenues from gaming, the most compute-intensive niche before AI, fell 8%.
Nvidia isn’t killing AMD with hardware. It’s beating AMD softly, becoming a software standard. One customer explained it to me recently while paying up for an Nvidia-based desktop. “AMD doesn’t have CUDA, so they cannot do AI stuff.”
The Nvidia Stack
It’s not just clouds that must upgrade for AI. The clients used by anyone involved with big databases must get faster. They must use Nvidia.
This virtual monopoly is troubling to Cloud Czars like Microsoft (NASDAQ:MSFT). Microsoft’s new chips are trained on its software stack. Amazon.Com (NASDAQ:AMZN) is just as intent on reducing its dependence on Nvidia silicon . Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) has said loudly that its new AI chips are faster than those of Nvidia.
But the Czars are still buying Nvidia chips. In case they even think of abandoning the Nvidia architecture, Nvidia is now building its own cloud to compete with them.
Dealing with this reality will be the main task of the decade for the Cloud Czars. You may notice that the fifth and smallest Cloud Czar, Meta Platforms (NASDAQ:META), isn’t even trying. It’s embracing Nvidia GPUs.
Where AMD Fits In
AMD fits into the Nvidia Era precisely where it fit into the earlier Windows-Intel (Wintel) era. It’s a necessary alternative, a secondary supplier, and a lower cost option.
But there’s an iron rule in the tech market. The market leader gets the lion’s share, and the lion’s share is whatever the lion wants.
The Bottom Line on AMD Stock
I own a little AMD stock. Consider it a hedge. I own a lot more Nvidia.
AMD sells for less than 9 times revenue, while Nvidia sells for over 36 times revenue. The reason for the disparity is that AMD is not as profitable. AMD’s operating margins in the third quarter were 4%. Nvidia brought almost 25% of revenue to its net income line.
This is going to continue. AMD and its customers will keep trying to get out of the Nvidia software trap. They will keep claiming progress. But it won’t show up in the numbers. Growth and profit margins matter above all with technology investments.
Being number two in a tech market is not good enough. It’s Nvidia shareholders who can break out the booze and have a ball this Christmas.
As of this writing, Dana Blankenhorn had LONG positions in AMD, MSFT, AMZN, GOOGL, NVDA and INTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.