The artificial intelligence (“AI”) boom has been a boon for GPU manufacturer Nvidia Corporation (NVDA), as it went from a company that primarily designed graphics processing units (“GPUs”) for gaming and other computational applications to a highly sought-after designer of advanced AI chips.

Nvidia’s early investments into AI has enabled it to boost its market cap from just over $400 billion at the end of 2022 to over $4 trillion today, making it the world’s most valuable company.

At present, Nvidia controls over 90% of the GPU market, driven by strong demand for advanced AI chips like Blackwell and its successor, Vera Rubin.

Meanwhile, Nvidia’s chief rival, Advanced Micro Devices (AMD), has long lagged behind in the GPU market.

For much of the past ten years, AMD has primarily been known for being a competitor to Intel (INTC) in designing central processing units (CPUs) for enterprise and consumer use cases. However, after a series of strategic moves such as spinning off its foundry business and designing better value CPUs, AMD eventually chipped away at Intel’s lead.

By 2018, AMD pivoted to cloud computing, launching its own GPUs for data center and AI workloads. Despite this, it has continued to struggle against Nvidia in both hardware design and software. In 2024, AMD generated $12.6 billion in data center revenue while Nvidia earned $115.2 billion.

While Nvidia is the undisputed leader in the AI GPU space, AMD may show signs of gaining ground on its competitor.

Earlier this week, OpenAI announced a multi-billion dollar data center partnership with AMD. Under this agreement, OpenAI has committed to the purchase and deployment of 6 gigawatts worth of AMD’s Instinct GPUs over the next few years.

As part of the deal, OpenAI will receive warrants for around 10% of AMD’s shares, worth roughly $160 million, awarded in phases if the company achieves certain deployment thresholds and if AMD’s stock reaches set targets.

While the total cost for this partnership wasn’t disclosed, AMD stated that it will cost billions of dollars per gigawatt of computational capacity.

Shortly after the deal was announced, AMD’s stock price rose by more than 20%.

Even though Nvidia is still the leader in this space, this news signals that AMD could be growing its share in the market. With AMD solidifying its position as a serious player in the advanced chip market, it could be a signal for investors to reevaluate the business.

We can see what the market thinks about AMD today through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At current valuations, the market expects AMDs Uniform return on assets (“ROA”) to rise from 21% last year to 30% by 2029. These expectations are modest, relative to the company’s historical performance.

Meanwhile, expectations for Nvidia are much higher. The market expects its returns to rise from 134% this year to 220% in the next five years.

If AMD can continue to win marquee deals in the AI space, investors will have to reevaluate their expectations for AMD and consider if the company can follow a similar trajectory as Nvidia. These expectation resets could drive AMD’s stock price upward, even after its recent boost.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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