These 2 Stocks Are Nvidia's Most Serious Competitors. But Are They Even Close?

Source The Motley Fool

For the last two years, it's been nearly impossible to tune into financial news programs or click on an article about a stock and not come across the words "artificial intelligence (AI)." AI is everywhere, and it appears that it's here to stay.

Among the hottest of AI darlings is Nvidia (NASDAQ: NVDA). In just two years, the company's share price has gained nearly 900% -- helping Nvidia become one of the world's most valuable businesses.

The biggest catalysts for Nvidia over the last two years come from its compute and networking business, which features the company's graphics processing units (GPUs) and data center services. With an estimated 88% of the total addressable market for GPUs, is there even a remote possibility for Nvidia to be dethroned in the chip realm?

Below, I'll explore the two companies that I see as Nvidia's most serious competitors and assess if either of them has a shot at stealing the spotlight.

1. Advanced Micro Devices

Nvidia's most direct rival is Advanced Micro Devices (NASDAQ: AMD). Like Nvidia, AMD has a budding GPU and data center business and has been a direct beneficiary of AI tailwinds over the last couple of years.

Indeed, AMD's third-quarter earnings report (released Oct. 29) was quite impressive. Total revenue rose by 18% year over year to $6.8 billion, while adjusted gross profit and operating profit increased by 23% and 34% year over year, respectively.

Over the last couple of years, AMD has been an aggressive acquirer of smaller AI platforms. While it will take some time for these new assets to bear fruit, I'm encouraged by the company's ability to accelerate sales and expand profit margins while integrating new products and services to bolster its AI portfolio.

By all accounts, AMD appears to be in solid position. However, a look underneath the hood suggests something entirely different.

NVDA Revenue (Quarterly) Chart

NVDA Revenue (Quarterly) data by YCharts

There are two important takeaways from the chart above. First, Nvidia is a mammoth operation compared to AMD and it's not even close. Last quarter, Nvidia generated $30 billion of revenue and $13.5 billion of free cash flow. The magnitude of this difference is almost hard to believe.

Moreover, the slope of Nvidia's revenue and cash flow far outweighs that of AMD. So not only is Nvidia multiples the size of AMD, but it's growing at an even faster rate.

Nvidia has been able to reinvest its excess profits into additional research and development and product initiatives, and is already set to release its next-generation Blackwell GPUs later this year. And while demand for Blackwell GPUs is already off the charts, AMD's latest financial guidance doesn't exactly leave much to be desired.

My bottom line with regards to AMD is that the company should continue to experience robust growth on the backdrop of an expanding generative AI opportunity. But with that said, I simply don't see the company eclipsing Nvidia's position in a material way.

2. Cerebras Systems

The second company that I see as a serious competitor to Nvidia is Cerebras Systems. Ever heard of it? If you haven't, that's likely because the company is still privately held. However, Cerebras is gearing up for an initial public offering (IPO), and a spin through the company's S-1 filing will give investors a lot to think about.

Unlike AMD, Cerebras is more of a tangential competitor to Nvidia. It specializes in a completely different type of chip architecture called a wafer-scale engine (WSE). In essence, a WSE is a gigantic chip whereas Nvidia's GPUs are quite small.

A giant chip wafer being manufactured.

Image source: Getty Images.

According to Cerebras' filings, a larger wafer-style chip has the potential for considerably more compute power, memory, and bandwidth compared to incumbent GPU infrastructure. While a new, disruptive type of chip may suggest that Nvidia is about to get leapfrogged, there are some important items to think about when it comes to Cerebras.

Similar to AMD, Cerebras is much smaller than Nvidia. In 2023, Cerebras reported $78.7 million of revenue -- up 220% year over year. Moreover, the company has already generated $136 million of sales through the first six months of 2024.

Although this pace of growth is impressive, the company is nowhere near the size and scale of Nvidia. On top of that, almost 90% of Cerebras' revenue stems from one customer.

To me, this degree of customer concentration suggests that while WSE architecture has a lot of potential, it has not necessarily gained much traction yet. In the long run, I do think companies may be keen on adopting new chip designs as investment in IT infrastructure continues to rise in coming years. But for now, I don't see Nvidia customers leaving in droves overnight to try out a relatively new and somewhat speculative type of chip.

I am intrigued by Cerebras, but as an investor in Nvidia, I'm not worried about the company being a headwind anytime soon.

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Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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