There's no hiding it: Graphics processing unit (GPU) leader Nvidia is eating rival Advanced Micro Devices' (NASDAQ: AMD) lunch in the data center space. However, investors don't always have to buy an industry leader to make a successful stock pick, especially if an also-ran company is trading at a significant discount.
A rising tide really can lift all boats, and that holds especially true with Nvidia and AMD, as large data center operators don't want to get locked into one GPU provider. Nvidia recently made a bold prediction about where data center infrastructure spending is going -- spending that will benefit both Nvidia and AMD. But the question remains: Does AMD provide enough value to warrant buying its shares over Nvidia?
Nvidia predicts massive growth in data center spending
Nvidia is focused on graphics processing units and the various software and technologies that support them. AMD's chip portfolio is much broader. It has GPU offerings that compete with Nvidia's, but also products such as embedded processors and CPUs (central processing units) for personal computers. Nvidia's prediction is specifically for the data center market, so let's ignore these other parts of AMD's business for now.
At its GTC A1 conference last month, Nvidia CEO Jensen Huang asserted that data center infrastructure spending is expected to reach $1 trillion annually by 2028. While Nvidia certainly won't get every dollar of that, bringing in about a quarter of it as revenue isn't out of the question, as that's about the share it gets about now. But what about AMD?
In 2024, AMD produced around $12.6 billion in data center revenue. By contrast, in its fiscal 2025 (which ended Jan. 26), Nvidia's data center revenue totaled $115 billion, so AMD's business is roughly a tenth of Nvidia's. With that in mind, it won't be surprising if AMD's annual data center sales approach the $25 billion mark over the next four years.
What are the implications of this? AMD's total 12-month trailing revenue today is $25.8 billion. That would indicate that AMD's revenue could rise significantly in the next four years, and that's without including any growth from its client (chips for personal computers), gaming (chips for consoles and GPUs designed specifically for gaming PCs), and embedded processors (purpose-built processors) divisions. While those divisions' sales won't grow at anywhere near the pace of data center sales, they can still provide a bit of a boost to AMD's financials.
While all of this growth is a key part of the AMD investment thesis, the stock is also fairly cheap right now.
AMD trades at a market-average price tag
Some significant one-time charges affected AMD's earnings numbers over the past 12 months, so using the trailing price-to-earnings (P/E) ratio to value its stock right now would paint a less accurate picture. A better choice is to use its forward P/E.
Trading at 22 times forward earnings, AMD is as cheap as it has been in several quarters. Furthermore, it's trading at essentially the same valuation as the S&P 500, which is valued at around 21 times forward earnings. However, if it benefits proportionally from the projected growth of the data center market, that level would easily propel it to market-beating returns.
And that's just from the revenue side.
In the fourth quarter, its data center division posted the second-best operating margins of its four divisions.
Division
Q4 Operating Margin
Data Center
27.7%
Client
12.7%
Gaming
11.2%
Embedded
40%
Data source: AMD.
If data center revenue growth outpaces these other divisions (besides embedded), AMD's operating margin will rise, in which case its profits will increase faster than its revenue.
If that projection pans out, the one-two punch of growth and improving margins will turn AMD's stock into a rocket ship, making today's price a great entry point. However, Huang's projection is for 2028, so investors who buy now will need to be willing to hold onto AMD's stock through any short-term turmoil that might arise along the way.
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Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
