Artificial intelligence (AI) is most likely here to stay. Companies are increasingly investing in harnessing the power of generative AI to increase productivity and widen their profit margins in 2023. Growth-focused investors who missed the massive 218% rally on AI computing chips leader Nvidia stock over the past 12 months could still hop onto its emerging market challenger and profit over the next five years.
Every emerging ecosystem has its clear winners – economically. The nuts and bolts suppliers to an emerging industry or ecosystem benefit all the time, and my top AI stock pick for the next five years lies in this category. It doesn’t feature on top Canadian AI stocks lists; however, it’s a must hold for investors bullish on AI’s growth.
While AI software platforms developers, including OpenAI (the creator of ChatGPT), and the established tech behemoths fight tooth and nail for user attention and race to acquire the most-promising AI start ups, the new AI ecosystem is still fluid. There’s room for surprises, and the winners aren’t decided as yet – using standard cash flow and profitability metrics. However, Nvidia and most recently, Advanced Micro Devices (NASDAQ:AMD) stand to make billions in AI hardware sales as software engineering teams scramble for capable computing power needed to train resource-hungry AI models.
AMD is my top AI stock pick for the next five years, and here’s why.
Advanced Micro Devices (AMD): A top AI stock for the next five years
AMD is my top AI stock pick to buy and hold over the next five years as it promises to repeat what it usually does in key computing chip markets. As history has proven, the US$181 billion technology company is successfully challenging established market leaders and profitably snatching significant market share from them. A similar script could play out in the fast-growing AI accelerators market.
Up until now, Nvidia has been the go-to supplier of cutting-edge AI computing chips and software platforms, and its ground-breaking H100 accelerator has created billions in sales already. AMD has designed its most powerful Instinct-branded MI300 AI processing chip, which is ramping up sales this quarter, and may become a formidable challenger to Nvidia’s widely popular H100.
AI chips to break growth records at AMD
AMD began shipping its latest Instinct AI chips in October, and management expects to sell US$2 billion worth of new data centre chips, including the AI-focused MI300 accelerators in 2024. CEO Lisa Su believes the company’s AI chipset could be the fastest to ramp up to the US$1 billion sales mark in the company’s history.
What’s more, AMD is buttressing its AI-chip product design efforts with a focused software ecosystem expansion strategy that may accelerate the wider adoption of its AI hardware offerings. The company recently acquired two AI-software companies, and recent news that AI startup Lamini has been running large language models (LLMs) on AMD hardware for a year could increase product uptake by bigger money spenders, and AI super-computing giants.
Over 5,000 potential customers are reportedly on the AI startup’s wait list. AMD could be registering early success in stealing some of Nvidia’s potential customers.
Coming from a cyclical slowdown in the personal computing (PC) chips and subdued data centre and gaming markets in 2022, the good times could be about to roll again for AMD. The company posted 4% year-over-year growth in quarterly revenue and adjusted earnings for the third quarter of 2023, as PC and date centre sales recovered.
A sustained near-term recovery in AMD’s traditional markets could combine with a fast-growing AI chip and software business line to propel AMD stock past its all-time highs around US$150 per share over the next five years. Bay Street analysts project a 20.8% surge in AMD’s revenue during the next year, and AMD stock looks fairly priced with a forward price-to-earnings (P/E) multiple under 30.
