You've probably heard the adage, "Birds of a feather flock together." This old saying is often applicable to stocks. Good news for a company can be good news for its rivals and vice versa.
Advanced Micro Devices(NASDAQ: AMD) stock declined sharply on Wednesday after announcing its third-quarter results. Some could interpret this sell-off as potentially a warning sign for the company's top rival, Nvidia(NASDAQ: NVDA). However, that isn't necessarily the case. Did AMD instead just give a big reason to buy Nvidia stock hand over fist?
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Reading between the lines
Let's first look at why AMD stock sank. The chipmaker reported Q3 revenue that was slightly higher than Wall Street's expectations. Its earnings were in line with the consensus estimate. Normally, those kinds of results wouldn't lead to a significant drop in a company's share price.
The main problem for AMD, though, was with its guidance. The company projected Q4 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 were expecting Q4 revenue of $7.55 billion.
But management's comments in the Q3 earnings call told a pretty good story for AMD's data center GPU business. CEO Lisa Su noted that at the beginning of 2024, the company expected data center GPU revenue of $2 billion. In July, its guidance was for revenue of $4.5 billion. Now, AMD anticipates full-year data center GPU revenue of $5 billion.
Su said that the environment for the data center GPU business has improved over the last two quarters. She mentioned that some large cloud service providers are increasing their data center capacity. The picture looks bright for 2025, too. Su stated, "[W]e feel very good about the market from everything we see. Talking to customers, there's significant investment in trying to build out the infrastructure required across all of the AI workloads."
Good news for Nvidia?
Are AMD's outlook and Su's comments about the data center GPU market good news for Nvidia? I think there's a strong case to be made that they are.
If AMD is hearing from big cloud service providers they're expanding capacity, you can bet Nvidia is hearing the same thing. And if those cloud customers are planning to buy more GPUs from AMD, they're probably planning to spend even more on Nvidia's GPUs.
Piper Sandler analyst Harsh Kumar indirectly supported this take with one of his questions for Su in the Q3 earnings call. In his setup for the question, Kumar noted that in 2025 AMD's "key competitor will take most 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 "key competitor" he referred to was Nvidia.
Su didn't take issue with those numbers. Kumar's estimates underscore just how dominant Nvidia is in the GPU market. AMD isn't taking market share away from Nvidia at this point. Instead, the overall market is expanding so much that both companies are enjoying strong growth.
Importantly, though, AMD's growth in the GPU market has paled in comparison with Nvidia's. There's no reason to think that will change soon. Therefore, AMD's expectations of higher GPU revenue will likely translate to even better news when Nvidia provides its next quarterly update on Nov. 20, 2024.
The potential fly 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 great Q2 results that topped Wall Street's expectations, but its stock fell anyway.
This could happen again. Analysts think Nvidia's Q3 revenue will soar nearly 82% year over year to $32.9 billion. Nvidia could deliver what would ordinarily be viewed as impressive growth yet still fail to hit Wall Street's lofty target.
However, I think the general 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.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
