Nvidia’s AI Sales Surge Signals Shift in Data Center Landscape, Puts Pressure on Intel

Nvidia Corp. delighted investors this week by presenting tangible proof that the surge in artificial intelligence (AI) is driving a significant sales increase. Amid the excitement created by the chipmaker’s achievements, however, a cautionary note was sounded: not everyone will partake in the feast.

The 10-Year Transition to Accelerated Computing

Jensen Huang, Nvidia’s CEO, identified a transformative shift occurring within the world’s data centers as companies rush to augment their AI computing power. According to Huang, organizations are reallocating their spending from Intel Corp.’s lucrative data center processors to Nvidia’s graphics chips, setting the stage for a decade-long transition towards accelerated computing. He emphasized that the workload in these data centers will predominantly consist of generative AI.

Intel’s Dominance at Risk

Although Huang refrained from mentioning any specific names, it was clear that his remarks targeted Intel’s stronghold in the data center industry. He asserted that data centers will be reconfigured, moving away from their dependence on central processors dominated by Intel and gravitating towards the utilization of graphics chips, a market where Nvidia thrives.

Intel’s Shares Plummet, Nvidia’s Soar

The impact of Huang’s statement was immediate, as Intel’s shares plummeted by 5.5% the following day. This dealt another blow to the once-dominant chipmaker, which held the title of the world’s largest chipmaker just two years ago. In contrast, Nvidia’s stock has surged by an impressive 160% this year, inching closer to achieving a $1 trillion market value. While Nvidia prospers, Intel’s growth remains lackluster. The overall chipmaker index has gained 32% during this period.

Intel Misses the Boat, but Counting Them Out Would Be Shortsighted

Zeno Mercer, senior research analyst at ROBO Global, remarked on Intel’s situation, stating that they have missed the opportunity, resulting in a negative impact on stock performance, valuation, and growth potential. However, Mercer cautioned against underestimating any company’s potential for growth and market share in the AI sector. ROBO Global, which counts Nvidia as its second-largest holding, acknowledges the missed opportunities by Intel but recognizes the potential for growth and resurgence.

AMD’s Position Improves, Investors React Positively

Investors hold a more constructive view of Advanced Micro Devices Inc. (AMD), a company that, like Intel, generates the majority of its sales from central processor units. AMD’s stock rallied by 11% the day after Huang’s comments, adding to its overall gains of 86% this year. AMD’s collaboration with major technology buyers in this field may position it favorably to regain ground against Nvidia.

AMD’s Pricey Valuation Raises Concerns

However, investing in AMD’s stock as a means to join the Nvidia-led rally does not come cheap. According to Bloomberg data, AMD’s price-to-earnings ratio stands at 37 times projected profits for the next 12 months, approaching Nvidia’s level of 50 times. While AMD has established itself as the second-largest manufacturer of graphics processing units for gamers, it has only recently entered the market for data center computing, potentially attracting customers such as Microsoft Corp. seeking alternatives to Nvidia.

Intel’s Struggles in the Graphics Chip Market

Intel has long attempted to penetrate the graphics chip market with limited success, while Nvidia has dominated it. AMD, as the second-largest producer of graphics processing units for gamers, has recently ventured into the realm of data center computing with optimized products. This strategic move positions AMD favorably, especially with large customers like Microsoft Corp. who are currently seeking alternatives to Nvidia’s offerings.

Intel and Others Falling Behind in AI

Despite Intel and other chipmakers, such as Qualcomm Inc., expressing their AI ambitions and unveiling products aimed at impacting the market, investors remain unconvinced. The lack of action from these companies in the AI sector is viewed as a significant detriment. Adam Sarhan, CEO of 50 Park Investments, warns that by the time they decide to join the AI bandwagon, they may find themselves too late or risk getting left behind. The rapid growth and expanding applications of AI could potentially disrupt the entire chip industry.

Nvidia’s Surge Drives Semiconductor Index to New Highs

Nvidia’s exceptional performance this year has propelled a robust rally in the Philadelphia Stock Exchange Semiconductor Index, which reached its highest level since April 2022. Following Nvidia’s optimistic forecast, the index experienced a 6.8% surge, its largest gain since November, bringing its 2023 increase to 32%. While Nvidia leads the way among the index’s components, Advanced Micro Devices has also delivered strong performance, with an 86% gain this year.