Microsoft And AMD Join Forces: New Era For AI Chip Market Competition
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Recently, we published a bullish article on Advanced Micro Devices, Inc. (AMD), highlighting its resilient earnings and emphasizing the importance of AI in the company's future. Shortly after, Bloomberg reported the game-changing collaboration between Microsoft Corporation (NASDAQ:MSFT) and AMD to develop AI chips, posing a challenge to Nvidia Corporation's (NVDA) near-monopoly in the AI semiconductor market-a topic we explored in-depth in our recent article on Nvidia. As shareholders of Microsoft and Nvidia, we believe that all parties involved - MSFT, AMD, and NVDA - stand to benefit from this development, and in this article, we are eager to share our rationale behind this optimistic outlook.
Microsoft Partners With AMD
We view Microsoft's recently reported collaboration with Advanced Micro Devices on the chipmaker's expansion into artificial intelligence (AI) processors as a strategic move in response to the growing demand for AI processing power. This partnership aims to offer an alternative to Nvidia's dominant position in the AI-capable graphics processing unit (GPU) market, with Microsoft providing financial support and working with AMD on a proprietary AI processor named Athena. The partnership underscores Microsoft's deepening involvement in the chip industry and bolsters AMD's strategic priority in AI.
The surge in AI applications, such as chatbots like ChatGPT and AI-enhanced Office tools, has created a pressing need for powerful processors, particularly from Nvidia. Microsoft's relationship with OpenAI and its commitment to integrating AI features across its software lineup has led to a demand for computing power that exceeded initial expectations and supply. While Microsoft continues to collaborate closely with Nvidia, the partnership with AMD demonstrates a proactive approach to addressing the urgent processor shortage and securing more of these critical components.
Microsoft has invested heavily in its silicon division, with nearly 1,000 employees now working under former Intel (INTC) executive Rani Borkar. This division has prioritized the Athena project, developing a GPU for training and running AI models that could be widely available as early as next year. However, developing a viable alternative to Nvidia's comprehensive suite of software and hardware will be a significant challenge, as Nvidia enjoys a substantial head start in the industry.
The pursuit of in-house AI processors is not unique to Microsoft, with other tech giants such as Amazon and Google also developing their own solutions. As AI technology continues to evolve rapidly, partnerships like the one between Microsoft and AMD will be crucial in fostering innovation and driving competition within the AI processor market.
Microsoft's Partnership with Nvidia
Before jumping to conclusions, such as Microsoft is dumping Nvidia due to its collaboration with AMD, it is essential to remember the deep partnership between Microsoft and Nvidia. In the past six months alone, there have been three significant collaborations between the two companies.
In March 2023, Nvidia announced a collaboration with Microsoft to provide millions of Microsoft enterprise users with access to powerful industrial metaverse and AI supercomputing resources via the cloud. Microsoft Azure will host two new cloud offerings from Nvidia: NVIDIA Omniverse Cloud and NVIDIA DGX Cloud. These services will give enterprises instant access to a full-stack environment for developing and managing industrial metaverse applications and the infrastructure needed to train advanced models for generative AI.
Moreover, Microsoft and Nvidia are connecting Microsoft 365 applications such as Teams, OneDrive, and SharePoint with NVIDIA Omniverse, a platform for building and operating 3D industrial metaverse applications. This collaboration will accelerate enterprises' ability to digitalize their operations and train advanced AI models.
In February 2023, Microsoft signed a ten-year deal with Nvidia to bring all its PC-based games to GeForce Now, Nvidia's game streaming platform. Microsoft also confirmed that it had obtained full support from Nvidia in this endeavor.
In November 2022, Microsoft and Nvidia partnered to build a massive cloud AI supercomputer within Azure, powered by Nvidia technologies, for high-performance computing (HPC) uses. This collaboration is designed to address the widespread adoption of AI in enterprises across various use cases. Microsoft's Bing and Teams applications already utilize Nvidia-powered instances for accelerated search and speech-to-text conversions, respectively.
Given the existing robust collaborations between Microsoft and Nvidia, it's clear that their relationship remains strong. While Microsoft's partnership with AMD signifies a strategic move to diversify its AI processing capabilities, it doesn't indicate an end to the company's long-standing alliance with Nvidia.
Win-Win-Win Development
In our view, the most significant risk to Nvidia lies in the possibility that the AI market does not develop as quickly as we have anticipated. We previously argued in 2021 that Nvidia had a trillion-dollar AI opportunity, and that was before the explosion of generative AI. Today, we believe the opportunity is even bigger, potentially in the range of "multiple trillions." However, estimating the AI opportunity at this moment is more art than science.
For example, if AI industry growth is stunted by the lack of GPU supply, Nvidia will have a much larger slice of a much smaller pie. Consequently, we believe the market will assign a much lower multiple to Nvidia's AI business. We would prefer to see a company like AMD enter the market, which should lead to multiple benefits.
Firstly, the entrance of AMD into the market could provide AI developers with a sense of security, knowing that there is a second source for their GPU supply. Secondly, competition should spur more innovation from Nvidia, AMD, and other chip vendors. This, in turn, should catalyze innovation among software developers and the rest of the ecosystem, including data vendors and cloud providers.
While Nvidia has an enormous opportunity in the AI market, the company's growth prospects could be hampered if the AI industry does not develop as expected. The entrance of competitors like AMD into the market, however, could have multiple benefits, including greater security for AI developers and increased innovation throughout the entire ecosystem. Ultimately, we believe that competition in the AI chip market is essential for its long-term growth and success.
Risks
While we remain enthusiastic about the opportunities ahead for Microsoft, AMD, and Nvidia, we recognize the dynamic and risk-laden nature of the market. Microsoft's track record in semiconductor development has seen limited success. For example, its attempts to create chips for Surface devices have yet to yield significant results. Moreover, despite working on an AI chip since 2019, Microsoft has not yet delivered, while competitors like Alphabet Inc./Google (GOOG) have successfully developed their own Tensor chips. Furthermore, Microsoft's partnership with AMD could increase its dependence on external vendors, diverting resources from internal development efforts.
As a new entrant in the AI chip market, AMD faces the uphill battle of establishing itself as a viable alternative to Nvidia's dominance. Surmounting Nvidia's stranglehold on AI developers, primarily through its CUDA platform, presents a significant challenge for AMD. To gain market share, AMD must rapidly innovate and develop competitive AI chips, potentially by targeting niche markets that may be smaller and less profitable.
Nvidia's risks are primarily tied to market dynamics and competition. If the AI market fails to develop as quickly as anticipated, Nvidia could find itself with a larger share of a smaller market, ultimately reducing growth and valuation. Moreover, increased competition from new entrants like AMD and emerging semiconductor startups, especially those in China spurred by U.S. export restrictions, could erode Nvidia's market share and profitability.
While AI presents significant opportunities for Microsoft, AMD, and Nvidia, it is important to acknowledge the risks and challenges inherent in this rapidly evolving market. The ability of these companies to navigate these risks will be crucial in determining their success in capitalizing on the vast potential of the AI space.
Conclusion
The partnership between Microsoft Corporation and Advanced Micro Devices, Inc., along with existing collaborations between Microsoft and Nvidia, signals a dynamic and rapidly evolving AI chip market. While competition in this space presents challenges for all parties involved, we believe it is essential for the long-term growth and success of the AI industry. Navigating the risks and uncertainties inherent in this market will be crucial for Microsoft, AMD, and Nvidia to capitalize on the vast potential of AI technology.
As these companies forge ahead, their strategic alliances and innovative approaches will shape the future of AI processing and redefine the competitive landscape. We are optimistic about the AI industry and have assigned a Buy rating on Microsoft Corporation, Advanced Micro Devices, Inc., and Nvidia Corporation.
Source: Seeking Alpha
