Opinion: Nvidia and AMD must brace for competition from a super-powerful artificial-intelligence processor – MarketWatch

It is increasingly looking like the future belongs to artificial intelligence.

Two of the hottest stocks in that industry are Nvidia NVDA, +1.04% and Advanced Micro Devices AMD, -2.32% The strength of those stocks is largely attributable to the excitement around the artificial-intelligence capabilities of their processors.

A key to success in hot technology companies is to keep an eye on newly developing competition. Prudent investors tend to sell into strength when new competition emerges. The momo (momentum) crowd is often left holding the bag.

Increased competition may be coming to Nvidia and AMD in the form of a new artificial-intelligence processor thats 10 times more powerful than their current offerings. Lets take a look at this. First, a chart.

Chart

Please click here for the annotated chart. Its a 30-minute chart of Nvidia covering the period during which the smart money has been taking the news of potential new competition into its analysis.

Please note from the chart that the VUD indicator has been consistently orange. The VUD indicator is the most sensitive measure of supply and demand in real time. Orange indicates a higher supply than demand. The VUD indicator staying mostly orange when the price does not move much or goes higher is often an early indicator of the strength of sellers in a stock.

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New competitor is a heavyweight

The new competitor is Fujitsu FJTSY, +4.47% of Japan. Fujitsu was founded in 1935 and employees 159,000 people in more than 100 countries. Fujitsu produces some of the most advanced processors for super computers. Fujitsu also produces processors for SPARC servers. SPARC servers have been popular and are now owned by Oracle ORCL, +0.02% after the company bought Sun Microsystems.

The new processor from Fujitsu will consist of 16 deep-learning processing elements, each of which will contain eight execution units. Fujitsu is targeting 10 times the performance of Nvidia and AMD processors. The new processor will be available in 2018.

Previously, another heavyweight, Intel INTC, +0.17% announced it would introduce competing processors for artificial-intelligence applications.

The software hurdle

As an engineer, I am reasonably confident that competitors are likely to come up with better hardware than Nvidia and AMD. However, the new competitors may have a difficult time catching Nvidia in software and development tools.

Investment implications

The momo crowd is still aggressively buying those stocks, but the smart money is inactive. Please see Professional investors are no longer excited about popular technology stocks and Momentum investors buy stocks even though gold and bonds are warning them buys stocks.

Prudent investors ought to pay attention to actions of the smart money. Yes, there are potential rewards in Nvidia and AMD, but the risks are high. It is fine to trade them for the short term when good setups appear, but caution is warranted if investing for the long term.

Based on my 30 years-plus in the markets, my firm conclusion is that most investors are better off by focusing on risk-adjusted returns. I have repeatedly seen traders who ignore risk making lots of money and then losing it all.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.

Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

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Opinion: Nvidia and AMD must brace for competition from a super-powerful artificial-intelligence processor - MarketWatch