Best Semiconductor Stock For 2017?

Deep learning and artificial intelligence (AI) are very fast growing areas. Artificial intelligence is already making our lives easier with many applications like the one in our smartphone, which is telling us which road to choose to avoid significant traffic. Moreover, artificial intelligence is finding use in many industries, for instance, healthcare, transport and logistics, customer service, and home maintenance.

Research companies see high growth in these areas. According to the research company Tractica, the deep learning software market is expected to surpass $10 billion by 2024. Also, according to research by MarketsandMarkets, the artificial intelligence market is estimated to grow from $419.7 million in 2014 to $5.05 billion by 2020, at a compound annual growth rate (CAGR) of 53.7%. 

Recently, both suppliers of graphics processing units (GPUs) NVIDIA Corporation (NSDQ:NVDA) and Advanced Micro Devices, Inc. (NSDQ:AMD) have signed new collaborations with leading cloud companies to supply their GPUs to accelerate artificial intelligence in the enterprise. NVIDIA has announced a collaboration with tech giants Microsoft Corporation (NSDQ:MSFT) and International Business Machines (NYSE:IBM), while AMD received orders from Alphabet (NSDQ:GOOGL) to supply GPUs for Google cloud platform. Investors might wonder which one of the two companies NVIDIA or AMD is going to win the GPU race to become the primary supplier for artificial intelligence uses. While right now Nvidia dominates the GPU application in AI, in my opinion, there is enough room for both companies to grow in this marker significantly. Therefore, as I see it, to take advantage of the fast-growing deep learning and artificial intelligence market, it is better to invest in shares of both companies.

Comparison between NVIDIA and AMD

The table below compares basic parameters of the two companies. As AMD has suffered a loss in the last few quarters, there is no P/E ratio for the stock. However, AMD's price to sales ratio of 1.76 is much lower than NVDA's price to sales ratio of 9.92. The annual estimated sales growth for NVDA is pretty high at 14.2%, while that of AMD is at 7.3%. It is worth noting that although AMD's trailing twelve months revenue $4.1 billion is about 67% of NVDA's revenue of $6.1 billion, its market cap of $8.3 billion is only 16.5% of NVDA's market cap of $50.3 billion.

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Source: Portfolio123

AMD Stock Performance

Year-to-date, AMD's stock is already up as much as 211.1% while the S&P 500 index has increased 7.9%, and the Nasdaq Composite Index has risen 7.4%. However, since the beginning of 2012, AMD's stock has gained only 65.4%. In this period, the S&P 500 Index has increased 75.3%, and the Nasdaq Composite Index has gained 106.5%. According to TipRanks, the average target price of the top analysts is at $7.07, representing a downside of 20.8% from its November 29 close price of $8.93. However, five-star analyst Ian Ing from MKM Partners gave it a target price of $10.5 eight days ago, indicating an upside of 17.6%, which appears reasonable, in my opinion.

NVIDIA Stock Performance

NVDA's stock has also surged sharply in 2016. Year-to-date, the stock is already up 182.9%. Moreover, since the beginning of 2012, NVDA's stock has gained an astounding 573%. According to TipRanks, the average target price of the top analysts is at $87.40, representing a downside of 6.3% from its November 29 close price of $93.25. Also for NVDA,five star analyst Ian Ing gave a target price of $106 eight days ago indicating an upside of 13.7%. However, in my opinion, shares could go even higher. 

Outlook for the Current Quarter

AMD Outlook

In its third quarter 2016 earnings report on October 20, AMD offered an outlook for the fourth quarter and the full year 2016. According to the company, it expects revenue in the fourth quarter to increase about 12% from the last quarter of 2015, but to decrease about 18% QoQ. For the full year 2016, AMD expects revenue to grow about 6% compared to 2015.

NVDA Outlook

In its third quarter fiscal 2017 earnings report on November 10, NVDA gave an outlook for the fourth fiscal quarter. According to NVDA, Revenue is expected to be $2.10 billion, plus or minus two percent, which is an increase of 50% year over year and 5% from the prior quarter.

Conclusion

Research companies are seeing high growth in deep learning and artificial intelligence areas. Recently both suppliers of graphics processing units NVIDIA and Advanced Micro Devices have signed new collaborations with leading cloud companies to supply their GPUs to accelerate artificial intelligence in the enterprise. While right now NVIDIA dominates the GPU application market in AI, in my opinion, there is enough room for both companies to grow in this marker significantly. Therefore, as I see it, to take advantage of the fast-growing deep learning and artificial intelligence market, it is better to invest in shares of both companies.