Better Artificial Intelligence (AI) Stock: AMD or Microsoft? – The Motley Fool

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A boom in artificial intelligence (AI) kicked off last year and has shown no signs of slowing. The launch of OpenAI’s ChatGPT near the end of 2022 reignited interest in the technology and forced many to rethink what was currently possible with AI.

As a result, demand for AI services has skyrocketed across multiple industries alongside soaring stock prices for those pivoting their businesses toward the technology. However, the industry appears to be nowhere near hitting its ceiling, with the AI market projected to expand at a compound annual growth rate of 37% through 2030.

So it’s not too late to see big gains from AI over the long term. Advanced Micro Devices (AMD -1.10%) and Microsoft (MSFT 1.20%) are attractive ways to invest in the industry, with both investing heavily in AI.

Let’s examine AMD and Microsoft’s businesses more closely and determine which is the better AI stock this month.

Advanced Micro Devices

Shares in AMD climbed 160% since last March, rallying investors with growing prospects in AI.

AMD was slightly overshadowed by Nvidia last year, as its rival got a head start and achieved an estimated 80% to 95% market share in AI chips. However, AMD is gearing up to challenge the chipmaker this year and could see big gains from its efforts long into the future.

Last December, AMD unveiled its new MI300X AI graphics processing unit. The chip was designed to compete directly with Nvidia’s offerings and has already caught the attention of some of tech’s most prominent players, signing on Microsoft and Meta Platforms as clients.

AMD’s earnings have yet to reflect its heavy investment in AI. However, its recent quarterly earnings suggest it’s moving in the right direction. In its fourth quarter of 2023, AMD’s revenue rose 10% year over year to $6 billion, beating analysts’ expectations by about $60 million. The company’s AI-focused data center segment posted 38% revenue growth. Meanwhile, improvements in the PC market boosted AMD’s client segment by 65% year over year.

In addition to AI chips, AMD is diversifying its position in the market by expanding into AI-powered PCs. According to research firm IDC, PC shipments are projected to see a major boost this year, with AI integration serving as a key catalyst. And a Canalys report predicts that 60% of all PCs shipped in 2027 will be AI-enabled.

AMD is likely to have a bright future in AI, and it could be worth investing in its stock now while the company is still at the start of its venture into the industry.

Microsoft

Microsoft was an early investor in AI, sinking billions into OpenAI in 2019. The lucrative partnership has granted Microsoft access to some of the most advanced AI models in the industry and seen its stock rise more than 59% year over year.

Microsoft has used OpenAI’s technology to introduce AI features across its product lineup and get ahead of competitors including Amazon and Alphabet. In 2023, the company added new AI tools to its Azure cloud platform, integrated aspects of ChatGPT into its Bing search engine, and boosted productivity in its Office software suite by adding AI features.

OpenAI’s models and Microsoft’s massive user base from services such as its Office productivity software and Azure could make the company unstoppable in AI. Meanwhile, Microsoft hit more than $67 billion in free cash flow last year, suggesting it has the resources to continue investing in its business and keep up with its rivals.

In its Q2 2024, ended December 2023, Microsoft posted 18% year-over-year revenue growth, with much of its growth owed to a 20% jump in revenue from its AI-focused intelligent cloud segment. The company is on a promising trajectory in AI, making this stock a compelling buy right now.

Is AMD or Microsoft the better AI stock?

AMD and Microsoft are at different stages in their AI journeys, with one at the beginning of its venture into AI chips and the other having made a heavy investment in the market nearly five years ago

Both companies are likely to have bright futures in AI over the long term. However, AMD’s market cap of $342 billion compared to Microsoft’s $3 trillion could mean AMD has more room to run in the coming years.

AMD EPS Estimates for 2 Fiscal Years Ahead Chart

Data by YCharts

Moreover, this chart shows AMD’s earnings could hit $7 per share over the next two fiscal years, while Microsoft’s may reach close to $16. When multiplying these figures by the companies’ forward price-to-earnings ratios displayed in the chart, you get a stock price of $412 for AMD and $549 for Microsoft.

These projections would see AMD’s stock rise 95% and Microsoft’s 34% by 2026. And with that, AMD’s stock is a no-brainer over Microsoft’s this month and a screaming buy alongside its outlook in AI.

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. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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