Intel is a better bargain and has an increasingly diverse position in the AI space.
Advanced Micro Devices (AMD +1.21%) has many investors bullish, with its stock price up more than 115% since the start of 2023. The company’s stock price rise coincides with an explosion of interest in artificial intelligence (AI).
Nvidia, a rival to AMD’s chips, initially attracted a lot of attention as its graphics processing units (GPUs) became the hardware of choice for many AI developers, but Wall Street soon turned its attention to AMD, which has the second-largest market share in GPUs and partners with many of the tech industry’s most prominent companies.
AMD has garnered investor support over the past year with competing AI GPUs, including the MI300X AI accelerator and the MI325X model due for release in the fourth quarter of 2024. The company’s hardware has caught the attention of several technology companies, with Alphabet, Microsoft, Oracle and Amazon joining its list of chip customers as they work to improve their presence in the AI space.
But while AMD has great long-term potential, its financials have yet to keep up with its soaring stock price. The chipmaker reported an 80% increase in revenue from its AI-focused data center division in the first quarter, but that was tempered by big declines elsewhere. As a result, total revenue for the period was up just 2% year over year.
The divergence between AMD’s stock price growth and earnings has pushed its price-to-earnings (P/E) ratio to a hefty 207. Therefore, it’s worth looking at other chip stocks that are better valued now and have similar or greater growth potential.
So forget about this do-it-all AI stock and consider buying its weaker rivals in 2024 instead.
Diversifying positions in AI
Intel (INTC – 0.80%) shares have fallen in recent years, dropping 41% since 2021, while AMD shares have risen 51%. However, investor sentiment appears to have shifted over the past month, with Intel shares up 2% and AMD shares down more than 10%.
After a tough decade for Intel, including losing market share in the chip industry and the end of a lucrative partnership with Apple, investors appear to be slowly starting to back a comeback for the underdog. In fact, the company has added new customers to its Gaudi line of AI chips this year, including Bosch, IBM and Seekr.
Last year, Intel began overhauling its business to prioritize AI and manufacturing, a shift that saw the company unveil a series of AI-enabled chips to rival hardware from AMD and Nvidia and begin construction on the first of at least four chip factories it will build in the United States.
In June, Intel showed off its Xeon 6 processors, developed to handle intensive workloads in data centers, and its Gaudi 3 processors, which can train and deploy AI models. The company also unveiled its Lunar Lake chips, designed specifically for AI-enabled PCs. Each of these products takes Intel into a different AI field, diversifying the company’s position in the industry.
In addition to chip design, Intel’s increased focus on the foundry market could make it a more reliable choice than AMD. Rising tensions between the U.S. and China have caused shares in many chipmakers to fall last week, as many of those companies rely heavily on services from Taiwan Semiconductor Manufacturing Co. But Intel’s shares have risen thanks to plans to expand its domestic foundry capacity with upcoming factories.
Intel investors should take a long-term view, as it will take time for the company’s chip factories to come online. But recent developments suggest that the company could have a very profitable future in AI as it becomes a major manufacturer and attracts companies to its designs. Intel said the foundry expansion will save “more than $8 billion to $10 billion by 2025,” and company executives project the company will achieve “non-GAAP gross margins of 60%” and operating margins of 40%.
Meanwhile, Intel Foundry is already making progress: It reported operating income of $625 million in the first quarter of 2024, a significant improvement from the $880 million loss it reported in the same period last year.
Recent developments suggest that Intel may become the leading manufacturer of AI chips in the coming years. Alongside a new line of AI chip designs, Intel is gradually establishing a promising position in the AI field.
Intel stock is a bargain you can’t miss
Investors have remained cautious about Intel relative to other AI stocks over the past year, keeping the company’s price attractive.
Data by YCharts.
The table shows that AMD stock is trading at about 207 times earnings, by far the highest among the most prominent companies in the chip market and AI. Conversely, Intel has the lowest P/E at 33, suggesting the company’s stock is much more valuable than AMD and many of its peers, making it a buying opportunity.
Intel has a more diversified position in AI, plus its stock is a no-brainer. AMD may seem omnipotent because of its large GPU market share and partnerships with big names, but Intel’s recovery could be an opportunity to get in early and profit from its resurgence. So it might be worth betting on this underdog that could grow fast over the next decade.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, 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. Dani Cook has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends ASML, Advanced Micro Devices, Alphabet, Amazon, Apple, Microsoft, NVIDIA, Oracle, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and IBM and recommends the following stocks: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
