Advanced Micro Devices (NASDAQ:AMD) stock is up 78% in 2023. Investors should be happy.
We’re not. AI chip rival Nvidia (NASDAQ:NVDA) is up over 206% this year and pulling away.
The reason has little to do with its chip designs. They’re nearly as good as Nvidia’s, according to some reviewers.
The problem is software. Nvidia’s AI support for data center chips is better than AMD’s. AMD knows it and just reorganized its AI team to catch up.
A Closer Look at AMD Stock
AMD has a competitive line of central processing units and graphics processing units. Its prices are lower than those of competitors, and thanks to the growth of technology, it generally does well.
For the first quarter of 2023, AMD reported non-GAAP net income of $970 million, 60 cents per share, on revenue of $5.35 billion. The second quarter, to be reported at the end of this month, is expected to be similar.
Earnings are then expected to accelerate, from $2.56/share this year to $3.51/share next year.
Being second was fine where a lower-cost alternative was welcome. A few years ago, it was good enough in data centers, which were built to use cheap chips.
It’s not good enough now.
The Cloud Problem
Throughout the 20th century, AMD stock was second behind Intel (NASDAQ:INTC), and the distance between them was massive. CEO Lisa Su, who has been in charge since October 2014, transformed the company and has slowly taken market share from Intel.
Under Su, AMD also brought out a good graphics chip line, called Radeon. GPUs run calculations quickly, first for graphics in video games, then for Bitcoin mining.
Now GPUs are central to AI. Each step of the way, Nvidia CEO Jensen Huang and his team have led, forcing AMD to follow.
The AI game, however, isn’t just about silicon. It’s about the software surrounding chips, and how they’re packaged to create solutions.
AMD’s Strategy
AMD hopes open source can help it gain on Nvidia. That was the message of AMD’s recent AI Day, where it highlighted open source support around its coming Instinct line.
The size of Nvidia’s lead is reflected in prices paid. Nvidia’s latest H100 chip sells for $10,000, and has been seen on eBay (NASDAQ:EBAY) for four times that price. AMD’s latest chip sells for $8,000.
It’s the same in the gaming market, where Nvidia dominates despite AMD cutting prices on its graphics cards to just $800.
The result is that the GPU market looks a lot like the PC market 30 years ago, when Intel dominated and AMD was an also ran. The irony is that PCs are now AMD’s big success. It has 31% of that market.
The Bottom Line
Today’s cloud is not yesterday’s cloud.
Yesterday’s cloud was focused on cost. The cheapest chip won. Today’s cloud is focused on capability, with the best AI solution winning.
This is why Nvidia is worth $1 trillion, while AMD is worth just $183 billion. The market says Nvidia’s solution is better.
AMD’s hope is that open source can work miracles. It can, but it takes time. Open source allows many companies to work together and beat that standard, but not right away.
Until then, AMD stock will depend on the market’s growth and its own low prices to remain competitive.
As of this writing, Dana Blankenhorn held LONG positions in AMD, INTC, and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.