Did AMD Just Give a Big Reason to Hand Buy Nvidia Stock?

You’ve probably heard the saying, “Birds of a feather flock together.” This old saying often applies to stocks. Good news for a company can be good news for its rivals and vice versa.

Advanced micro devices (AMD -3.05%) The stock fell sharply on Wednesday after announcing third-quarter results. Some could interpret this sell-off as a potential warning sign for the company’s biggest rival, Nvidia (NVDA -4.72%). However, that is not necessarily the case. Instead, did AMD simply provide a major reason to buy Nvidia stock hand over fist?

Read between the lines

First, let’s look at why AMD stock sank. The chipmaker reported third-quarter revenue that slightly exceeded Wall Street expectations. Earnings were in line with the consensus estimate. Normally, these types of results wouldn’t lead to a significant drop in a company’s stock price.

However, the biggest problem for AMD lay with its accompaniment. The company expected fourth-quarter revenue of $7.2 billion to $7.8 billion. The midpoint of the range – $7.5 billion – represents a year-over-year increase of 22% and a sequential increase of 10%. However, analysts had expected fourth-quarter revenue of $7.55 billion.

But management’s comments in the third-quarter earnings call told a pretty good story for AMD’s data center GPU company. CEO Lisa Su noted that the company expected data center GPU revenue of $2 billion by early 2024. Sales of $4.5 billion were expected in July. Now AMD expects full-year data center GPU sales of $5 billion.

Su said the environment for GPU business in data centers has improved over the past two quarters. She said some major cloud service providers are increasing the capacity of their data centers. The picture for 2025 also looks rosy. Su stated: “From everything we see, we feel very good about the market. When we talk to customers, there is significant investment in building out the infrastructure needed for all AI workloads.”

Good news for Nvidia?

Are AMD’s prospects and Su’s comments on the data center GPU market good news for Nvidia? I think there is a strong argument that this is so.

When AMD hears from major cloud service providers that they are expanding capacity, you can bet Nvidia will hear the same. And if those cloud customers plan to buy more AMD GPUs, they’re likely planning to spend even more on Nvidia’s GPUs.

Piper Sandler analyst Harsh Kumar indirectly supported this view with one of his questions to Su on the third-quarter earnings call. In his setup for the question, Kumar noted that by 2025, AMD’s “main competitor will take over the largest share of the TAM (total addressable market)” of the GPU market with $50 billion to $60 billion, compared to AMD’s $5 billion to $10 billion . That “main competitor” he was referring to was Nvidia.

Su had no objection to those figures. Kumar’s estimates underscore how dominant Nvidia is in the GPU market. AMD is not taking market share currently away from Nvidia. Instead, the overall market is expanding so much that both companies are experiencing strong growth.

Importantly, however, AMD’s growth in the GPU market has paled in comparison to Nvidia’s. There is no reason to believe this will change any time soon. Therefore, AMD’s expectations of higher GPU revenues will likely translate into even better news when Nvidia announces its next quarterly update on November 20, 2024.

The potential is in the ointment

Before we jump to the conclusion that AMD gave investors a reason to buy Nvidia stock hand over fist, we need to consider a potential fly in the ointment. Nvidia reported stellar second-quarter results that exceeded Wall Street expectations, but the stock still fell.

This could happen again. Analysts expect Nvidia’s third-quarter revenue to rise nearly 82% year-over-year to $32.9 billion. Nvidia could achieve what would normally be seen as impressive growth, but would still fall short of Wall Street’s lofty target.

However, I think the overall GPU market dynamics presented in AMD’s Q3 earnings call bode well for Nvidia. With the new Blackwell platform chips on the way, Nvidia’s future looks bright.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has one disclosure policy.