When it comes to artificial intelligence (AI) and semiconductors, one name seems to find itself at the top of the leaderboard: Nvidia. But for investors looking to build a diversified portfolio, it would behoove them to look beyond the latest company to reach the trillion-dollar market cap club.
Two other leaders in AI chips are Advanced Micro Devices(NASDAQ: AMD) and Qualcomm(NASDAQ: QCOM). While each company has enjoyed gains in the stock price on a year-to-date basis, this is likely driven by the euphoria around AI and the momentum it's brought to the Nasdaq Composite index at large.
Over the last three months, both AMD and Qualcomm have given up some prior gains. Given this reversion, now may be an opportunity to lower your cost basis and scoop up some shares at an attractive level.
1. Advanced Micro Devices
For the three months ended July 1, AMD reported total revenue of $5.4 billion, which represented an 18% decline year over year and a flat performance compared to the first quarter. On a segment basis, AMD's data center business decreased 11% year over year while its client segment dropped 45%.
Regarding the client segment, the company continues to cite waning demand for personal computers. At a macro level, this makes some sense due to lingering inflation and its effects on consumer discretionary spending habits.
As far as data center revenue goes, my suspicion is that AMD is losing market share to Nvidia, which set a record in its own data center business for the second consecutive quarter. With this said, AMD's management is still calling for growth in the data center business in 2023, suggesting the back half of the year should carry some tailwinds.
The chart above illustrates the change in AMD's price-to-sales (P/S) ratio over the last three years. The takeaway is that given the company's plateauing financial profile, some investors are fleeing the stock and looking to stockpile cash elsewhere.
My argument is that given the precipitous drop, now could be an opportunity to scoop some shares at a discount. While Nvidia's performance deserves applause, it's unlikely that a single player will win the AI arms race. I view AMD as an integral part of the broader AI equation in the long run. Although the company needs to prove that its data center business can, in fact, compete with Nvidia, the stock looks like a compelling value play that is tough to pass on at the moment.
Qualcomm's situation isn't too far off from its cohort above. The company's fiscal third quarter, ended June 25, was nothing short of mundane. The top and bottom lines declined year over year and near-term guidance left little to be desired.
And yet, in the midst of an otherwise mediocre report, the company has actually quietly come out with some exciting news. When it comes to its Internet-of-Things (IoT) business, Qualcomm shared that it partnered with social media giant Meta Platforms to bring generative AI applications to hardware devices including smartphones and virtual reality (VR) headsets. Moreover, earlier this month Qualcomm disclosed that it will be supplying chips for Apple's smartphones throughout 2024, 2025, and 2026.
The chart above illustrates the forward price-to-earnings (P/E) ratio for Qualcomm benchmarked against Nvidia and AMD. It's easy to see that both Nvidia and AMD command forward P/E multiples that are nearly triple that of Qualcomm.
Qualcomm may not be innovating at the same pace as Nvidia or AMD, but the company clearly has some clout with big tech and this seems to be completely overlooked by investors. While the financial gains from partnerships with Meta and Apple likely will not be reflected in the near term, these relationships should signal that Qualcomm is going to be an important player in AI in some fashion.
For this reason, the disparity in trading premiums among these stocks is difficult to justify on pure valuation fundamentals. Given how far off the company's P/E ratio is from three-year highs, now looks like a unique opportunity to buy into the stock at undervalued levels.
10 stocks we like better than Advanced Micro Devices
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Advanced Micro Devices wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of September 18, 2023
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. Adam Spatacco has positions in Apple, Meta Platforms, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Meta Platforms, Nvidia, and Qualcomm. The Motley Fool has a disclosure policy.