If you've been following the artificial intelligence (AI) narrative over the last couple of years, then chances are you're familiar with the term "large language model" (LLM).
LLMs such as ChatGPT, Gemini, and Claude each boast a multitude of capabilities and selling points, but one of the overlapping features of these models is that they can answer questions on just about any topic almost instantly. In just a couple of years, the rise of LLMs has turned the process of spending minutes or even hours on the internet to find the answer to a question into an antiquated function.
While LLMs can be fun to use, have you ever wondered how these models are able to read your question, scrape the internet for information, and process this data so quickly?
Perhaps the biggest supporting pillar of an LLM's foundation is a piece of hardware called a graphics processing unit (GPU). GPUs are housed inside of data centers and stored together in large clusters on server racks. In turn, these chipsets are able to process enormous volumes of data to generate detailed responses to inputs fed through the LLM.
Right now, Nvidia is the leader of the GPU landscape -- having acquired an estimated 90% market share. Nvidia built its substantial lead in the GPU realm thanks to its first mover-advantage, meaning that the company had very little in the way of legitimate competition since AI emerged as the hot new ticket in the technology sector.
Unsurprisingly, eager investors have fueled Nvidia's share price to new highs over the last couple of years. In fact, as of this writing, Nvidia is the second most valuable company in the world as measured by market cap.
Nevertheless, Advanced Micro Devices(NASDAQ: AMD) recently started demonstrating its own ability to penetrate the data center GPU market. Below, I'm going to detail why I think AMD's "Nvidia moment" may have finally arrived and assess why the stock looks like a screaming buy right now.
AMD gets great news from Oracle
Nvidia's first-mover advantage in the GPU market also came with a lucrative benefit in the form of pricing power. A combination of soaring demand for chipware and lack of competition allowed Nvidia to sell its GPUs at astronomical prices -- making it a highly profitable product for the company.
There are only so many companies out there that can afford to spend billions of dollars on a consistent basis to buy Nvidia's hardware, and so it shouldn't come as a surprise that the company boasts the likes of "Magnificent Seven" members Microsoft, Meta Platforms, Tesla, and Alphabet as some of its largest customers.
Debating whether Nvidia or AMD has the superior chipware is more of a subjective argument. With that said, the introduction of AMD's MI300X accelerators comes with more than just an alternative GPU on the market. AMD can compete with Nvidia on price, and recent trends indicate that some big tech companies may be looking for ways to build their AI infrastructure in a more cost-efficient manner.
For example, AMD's MI300X accelerator chips have garnered both Microsoft and Meta as customers in recent quarters. In addition to Microsoft and Meta, Oracle recently shared with investors that it "signed a multi-billion dollar contract with AMD to build a cluster of 30,000 of their latest MI355X GPUs."
While AMD's foray into the GPU realm is still nascent, I think the company has done an impressive job acquiring leading AI enterprises as customers -- especially ones that have been working closely with Nvidia over the last two years.
Given AMD is scheduled to release next-generation chipsets, I find the company's early wins with its current architecture as an encouraging sign of what could be in store over the next couple of years.
Image source: Getty Images.
AMD's valuation is a bargain
Unlike its counterpart, AMD's share price has not received anywhere near the same level of enthusiasm compared to Nvidia. But with shares down 47% over the last year, AMD stock has become too cheap to ignore.
As of this writing, AMD is trading at a forward price-to-earnings (P/E) multiple of 22 -- its lowest level in well over a year.
I think investors aren't giving AMD's GPU business enough credit and view the company as a laggard compared to Nvidia. But in my eyes, AMD need not outperform Nvidia's data center business in order to be seen as a worthy investment.
Rather, I think that AMD's current trajectory and impressive customer wins could lead to a prolonged period of sustained accelerated growth -- underscored by the company's relentless pursuit of incremental market share in the GPU realm.
In other words, AMD may not become the No. 1 player in the chip space. But if the company can demonstrate its ability to continue winning large contracts and grow at a pace commensurate to or even faster than Nvidia (already a mature player in the GPU industry) then I could see growth investors flocking to AMD stock as an alternative to Nvidia.
Despite an underwhelming performance over the last year, I think AMD stock could be on its way to witnessing a similar path to that of Nvidia following the initial jolt from the AI boom.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Meta Platforms, Microsoft, Nvidia, Oracle, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
