Better Artificial Intelligence Stock: Alphabet vs. AMD

Alphabet (GOOG -1.54%) (GOOGL -1.42%) and Advanced Micro Devices (AMD 2.89%) represent two different ways to invest in the growing artificial intelligence (AI) market.

Alphabet's Google, which already owns the world's largest search engine, has been expanding its Gemini AI ecosystem with new tools for consumers and businesses. It also uses AI algorithms to craft targeted ads for its search engine, advertising network, and YouTube platforms.

AMD doesn't get as much attention as Nvidia as an AI chipmaker, but it's also been ramping up its production of its AI-focused data center chips. The rapid expansion of that business -- which includes its Epyc central processing units (CPUs) and Instinct graphics processing units (GPUs) -- is offsetting the slower growth of its PC, gaming, and embedded chipmaking segments.

Over the past three years, Alphabet's stock rallied 27% as AMD's stock advanced 36%; both outperformed the S&P 500's 26% gain. But which one is the better overall investment on the AI market right now?

Alphabet's revenue rose 41% in 2021 as it lapped Google's slowing ad sales throughout the pandemic. But its revenue only grew 10% in 2022 and 9% in 2023. Google's ad sales cooled off again as the macro headwinds intensified, and it faced stiff competition from other advertising platforms.

The bulls had expected Google to expand YouTube's advertising business to offset the slower growth of its search, display, and advertising network segments, but that thesis collapsed over the past two years. YouTube's ad sales rose 46% in 2021 but grew just 1% in 2022 and 8% in 2023. Its ad sales increased 21% year over year in the first quarter of 2024, but it only grew 13% (versus analysts' expectations for 17% growth) in the second quarter.

It didn't offer a clear explanation for that slowdown, but it could be facing tougher economic and competitive headwinds as it cannibalizes its own ad sales with its paid YouTube subscriptions. YouTube's slower-than-expected ad sales, along with its ongoing decline in advertising network revenue, partly offset its stable sales of search and display ads.

Another major issue is Google's lackluster progress in the AI market. It has been adding more generative AI tools to its cloud-based services, but those efforts have been overshadowed by Microsoft's big investments in OpenAI. Microsoft's integration of ChatGPT into its Bing search engine and Copilot AI assistant -- along with OpenAI's introduction of its own SearchGPT search engine -- could generate unpredictable headwinds for Google's core search engine.

For 2024, analysts expect Alphabet's revenue and earnings to rise 13% and 32%, respectively, as the economy warms up again. They expect its revenue and earnings to grow 11% and 14%, respectively, in 2025. Those are decent growth rates for a stock that trades at 23 times forward earnings, but its long-term challenges might compress its valuations.

AMD's revenue surged 68% in 2021 and 44% in 2022. That rapid growth was driven by soaring sales of PCs during the pandemic, the launches of new gaming consoles, and its acquisition of the embedded chipmaker Xilinx in early 2022.

Revenue declined 4% in 2023 as it lapped that acquisition and its PC and gaming console markets cooled off. But as those businesses lost their momentum, it ramped up production of Instinct data center GPUs -- which offer performance comparable to Nvidia's GPUs for a fraction of the price -- and its Epyc CPUs for servers.

As a result, its data center chip sales surged 80% year over year in the first quarter of 2024 and jumped another 115% in the second quarter. Its data center chips accounted for 48% of its top line in the second quarter, up from 24% a year earlier.

The rapid expansion of that business complemented the stabilization of its PC CPU business (driven by its new Ryzen CPUs) and offset its declining sales of gaming GPUs, gaming console APUs, and embedded chips over the past year. Analysts expect its revenue and adjusted EPS to increase 13% and 29%, respectively, for the full year.

For 2025, analysts expect its revenue and adjusted EPS to rise 28% and 59%, respectively, as it continues to sell more AI-focused data center chips. However, its stock isn't cheap at 42 times forward earnings.

Nvidia -- which leads the discrete GPU market, generates more revenue from the data center market and is growing faster -- trades at just 45 times forward earnings. So for now, AMD needs to consistently expand its higher-growth Instinct, Epyc, and Ryzen businesses to support its premium valuation.

AMD seems pricier than Alphabet, but it faces fewer headwinds. It is quickly carving out a niche as the second major provider of data center GPUs, while Alphabet is still grappling with YouTube's slowdown and the shifting AI market.

Therefore, I believe AMD will climb higher as more investors consider it as an alternative to Nvidia. But Alphabet's stock could stagnate as they fret over its ability to keep pace with Microsoft, OpenAI, and other big competitors in the generative AI space.