Advanced Micro Devices vs. Marvell Technology

Semiconductor stocks continued to perform well in the market in 2024, as seen by the 33% gains recorded by the stock PHLX semiconductor sector index at the time of writing. It is worth noting that this sector performed better than the broader sector S&P500 an index increase of 15% is quite a large margin.

However, not all semiconductor companies have benefited from the sector’s explosive growth. Shares Advanced Micro Devices (NASDAQ:AMD) AND Marvell technology (NASDAQ:MRVL) recorded growth this year of just 9% and 19%, respectively. They have significantly underperformed the broader semiconductor market, even as both companies benefit from rising demand for artificial intelligence (AI) chips.

However, a closer look at their companies will tell us that they could witness a positive return as the use of artificial intelligence increases. But if you’re considering adding AI semiconductor stocks to your portfolio, which of these two underperforming chipmakers should you bet on? Let’s find out.

AMD case

AMD chips are mainly used in personal computers (PCs) and data centers, and both of these markets are benefiting from the spread of artificial intelligence. For example, the data center market is experiencing a construction boom thanks to artificial intelligence. According to McKinsey, data center construction could grow at a rate of 10% per year by 2030, although there is a chance that the construction of hyperscale data centers will grow at a rate of 20% per year.

At the same time, existing data centers are being rapidly modernized to cope with AI workloads. All of this explains why AMD expects the AI-centric data center chip market to grow from an estimated $45 billion last year to $400 billion by 2027. The good news for AMD investors is that it is gradually gaining ground in this market.

The company forecasts revenue from sales of AI data center chips of more than $4 billion this year. This is twice as much as AMD expected last year. Of course, with that said, AMD is still a smaller player in the AI ​​chip market Nvidia has established an almost monopolistic position in this space. However, the silver lining is that it wants to increase its market share by bringing more competitive chips to the market. Moreover, the company now plans to release a new AI chip every year to fill the gap with Nvidia.

Investors should note that AMD’s data center revenues grew an impressive 80% year-over-year to $2.3 billion in the first quarter of 2024 as it entered the AI ​​chip market. This trend is likely to continue as this market continues to develop.

The story continues

AMD has another potential growth driver with AI due to its growing share of the PC processor market. According to Canalys, sales of AI-enabled desktop computers are expected to achieve a compound annual growth rate of 44% by 2028. AMD is already capitalizing on this opportunity, as its PC processor sales revenue increased 85% year-over-year in the first quarter.

As these markets become more popular and AMD releases new products to take advantage of them, growth rates should continue to improve. Analysts forecast AMD’s earnings to increase 32% in 2024 to $3.51 per share. The chipmaker is expected to maintain this strong growth trend over the next few years as well.

Meanwhile, consensus is for AMD earnings to grow at a compound annual rate of 33% over the next five years. So there’s a good chance the semiconductor stock could shake off its weak performance and start growing again thanks to AI-related catalysts.

Marvell Technology case

Like AMD, even Marvell Technology is taking advantage of the AI-driven growth of the data center market. However, Marvell targets a different niche of this market because it sells custom chips programmed to perform specific tasks versus AMD’s data center GPUs (graphics processing units), which are designed for general-purpose computing.

Morgan Stanley forecasts that the custom AI chip market could grow as much as 85% annually through 2027 and generate revenues of $30 billion in 2027. Marvell’s data center business is already benefiting from this rapidly growing trend. The company reported an 87% year-over-year increase in data center revenue in the previous quarter thanks to “beginning development of our custom AI programs” to $816 million.

The company’s data center segment generated 70% of revenue last quarter. More importantly, it looks like the needle will move even more in this fiscal year and beyond. During the company’s May earnings conference call, CEO Matt Murphy said, “Our custom AI computing programs begin shipping in the first half of this fiscal year. We expect very significant growth in… () the second half of the year. this year, followed by a full year of high-volume production in fiscal 2026.”

Moreover, Murphy projects that its addressable opportunity in the custom AI chip market could be worth as much as $45 billion in 2028. As a result, the company now sees a larger addressable market in data centers expected to be worth $75 billion in 2028, up from $21 billion last year. This probably explains why Marvell’s profits are expected to grow at a tremendous rate over the next few years.

So, like AMD, even Marvell Technology has the potential to become a mainstream AI investment in the long run, which could help the share price rise rapidly after its poor performance so far this year.

Verdict

We have seen that both AMD and Marvell will benefit from AI and could deliver significant earnings growth in the future. So now we’ll take a look at their valuations to see which one offers more value to investors right now.

As the chart below shows, both AMD and Marvell are fairly evenly matched in terms of sales multiples and future earnings multiples.

Additionally, both companies currently have their own challenges. While AMD’s impressive growth in data centers and PCs has been overshadowed by weakness in the gaming and embedded segments, Marvell faces challenges in the networking, carrier, consumer and automotive markets. However, both companies are expected to experience strong growth in the future thanks to AI.

Therefore, investors may find it difficult to choose one of these two AI stocks for their portfolios, although it will not be surprising to see AMD emerge as the preferred choice as it has a larger addressable market related to artificial intelligence in the form of AI GPUs and PCs, which in the long run In the long run, they could help the company develop faster.

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Harsh Chauhan has no position in any of the companies mentioned. The Motley Fool covers and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Marvell Technology. The Motley Fool has a disclosure policy.

The Better Artificial Intelligence (AI) Stocks: Advanced Micro Devices vs. Marvell Technology was originally published by The Motley Fool