BlackJack3D
Advanced Micro Devices, Inc. (AMD) reported Q4 earnings yesterday (January 30, 2024), along with an update on the earnings call about its outlook for AI accelerators this year. AMD’s update provides material new information for Nvidia Corporation (NASDAQ:NVDA) investors.
I have published updated quarterly projections for AMD’s AI accelerator revenues in the article “AMD: The 2024 AI Outlook Is Very Positive.” Readers should take a look, but my main conclusion is that by Q4, AMD will probably reach about 8-10% market share by revenue in data center GPUs. In this article, I discuss what AMD’s strong outlook may mean for Nvidia.
Demand For AI Chips Remains Seemingly Endless
We are now a year into the post ChatGPT explosion of demand for AI chips, and AMD’s update provides yet another credible data point signaling that there is still plenty of demand left unfulfilled. This is despite three quarters of Nvidia trying to move heaven and earth to ramp production (with further increases to come), and despite Nvidia continuing to be sold out for multiple quarters. Yet, AMD has lined up significant cloud customers, dozens of ongoing customer engagements, and now has a backlog of $3.5 in firm commitments (up from $2 billion the previous quarter). And this is despite the fact that although AMD’s accelerators are a bit cheaper, they come with additional costs and hassles due to AMD’s weaker software offerings and ecosystem.
In my opinion, this goes to show just how much demand is still left for AI chips. As far as worries about AI chip demand fading are concerned, AMD’s update suggests that even if it eventually happens, it is still more than a few quarters away. AMD also spoke about “multi-generational conversations” with customers, which adds a further data point suggesting the persistence of AI chip demand growth over the coming years.
On the overall demand front, then, AMD’s update is a positive signal for Nvidia investors. The market can still absorb a lot more AI chips.
Market Share Losses Likely Are Coming, But Overall Growth Should Outstrip It
The flip side of AMD’s update is, of course, that Nvidia could lose market share in data center GPUs. AMD’s firm commitments with customers already imply annualized run-rate revenue of $5-6 billion in Q4, and I now expect that further bookings can very realistically take AMD to an $8 billion/year run-rate for data center GPU sales in Q4, with further upside. This should amount to a roughly 8-10% share of the data center GPU market in Q4. This is a fairly significant loss of market share for Nvidia, although it won’t properly materialize until H2, when AMD expects to accelerate its MI300 ramp.
Of course, AMD is also continuing to forecast 70% annual growth in the market for data center AI accelerators through 2027, so even with a 10% market share loss, Nvidia should continue to post massive top line growth in 2024 provided it can successfully keep ramping supply. With CoWoS (chip-on-wafer-on-substrate) capacity at Taiwan Semiconductor (TSM) slated to double this year, Nvidia should probably be in good shape to grow rapidly this year.
Significant Margin Compression Probably Won’t Materialize Until H2 2025 (Or Later)
Although AMD is selling its accelerators for a lower price than Nvidia, I don’t expect Nvidia to engage in price competition for the time being. Some of the price difference should already be balanced out by lower deployment costs and a better software ecosystem for Nvidia chips, and it doesn’t make much financial sense for Nvidia to lower prices on 90% of chips in the market to prevent a few percentage points of market share loss. It is also possible that the need to compete on price will be further reduced once Nvidia launches its upgraded H200 accelerators, and its next-generation B100 accelerators, this year.
Even if Nvidia is eventually motivated to compete on price, I would not expect that to begin until the end of this year once AMD has gained a bigger foothold. And then, given how long things take to go from a new order to delivery and revenue recognition, I don’t think we should expect to see significant margin compression for Nvidia until the second half of next year.
Nvidia Is A Bit Riskier Now
AMD’s strong outlook through 2024 somewhat worsens the risk profile for Nvidia. There is now some more downside risk that AMD could eventually reach an even higher market share over the next few years – say, 20% to 40%. AMD has proven a fierce competitor in its rivalry with Intel (INTC), and history could conceivably repeat itself.
But even with fierce competition from AMD, Nvidia could potentially still keep growing if overall demand for AI accelerators keeps ballooning.
It is also possible to mitigate this risk by taking a long position in AMD (which also has a strong buy rating from me).
Wait And See Still Makes Sense
I last rated Nvidia stock in November in the article “Nvidia: Smooth Sailing.” Here is what I had said then:
Although concerns about new entrants, margin contraction, and China export restrictions certainly have merit, investors should not lose sight that Nvidia’s top and bottom lines will most likely keep growing at a rapid clip for another few quarters. The aforementioned concerns should not have a significant impact on Nvidia’s impressive growth trajectory for some time. By the time the impact materializes, Nvidia will be in a stronger financial position and be able to absorb some of the impact due to the rapid growth of the overall AI accelerator market. Hence, I again think that investors can confidently hold Nvidia stock for another couple of quarters and then evaluate how the industry is evolving.
I think that this overall view continues to make sense because Nvidia’s growth is likely to remain strong for multiple quarters. Especially with next-generation Nvidia chips on the horizon while AMD is still ramping its current generation, jumping ship would seem premature. Of course, AMD’s strength out of the gate with the MI300 series is a net negative for Nvidia. But Nvidia still makes one of the most sought after pieces of technology in the world, and it is still likely to remain the leader in AI chips for multiple years. It is important to not lose sight of this broader picture.
Hence, overall, Nvidia remains a strong buy for me.
