Better Semiconductor Stock: Nvidia or Advanced Micro Devices | The Motley Fool (2024)

In the battle for chip supremacy, two of the top companies battling it out are Nvidia (NVDA -0.36%) and Advanced Micro Devices (AMD 1.72%). Over the past five years, both stocks have been strong performers. AMD is up over 433% during that stretch, which is outstanding. However, that return pales in comparison to the over 3,000% gain in Nvidia's stock.

Nvidia has been the better stock during the past five years, but which stock will likely outperform over the next five?

Nvidia vs. AMD

At the moment, the buildout of artificial intelligence (AI) infrastructure benefits both companies, given the demand for the graphic processing units (GPUs) needed to power large language model (LLM) training and artificial intelligence (AI) inference. This insatiable demand for GPUs led Nvidia's data center segment to post $22.6 billion in fiscal 2025 Q1 revenue (for the quarter ending April 28, 2024), an incredible 427% year-over-year increase. AMD's data center segment, meanwhile, saw its fiscal 2024 first-quarter revenue soar more than 80% year over year to $2.3 billion.

Nvidia has become the clear leader in the AI chip space, which can be seen with its data center segment generating nearly 10 times the amount of revenue that AMD's data center segment produced. The company's GPUs have become the primary ones used, due to its CUDA (Compute Unified Device Architecture) software platform, which developers have long been trained on to program the chips. This, in turn, has helped create a wide moat for the company's GPUs, giving it more than about 80% market share.

However, the segment is still growing nicely for AMD as its GPUs become an alternative to Nvidia's chips, which are in tight supply. Enterprises often like to have multiple suppliers so they don't become dependent on just one.

AMD is making some inroads. Last month, Microsoft (MSFT -1.30%) announced that it would offer clusters of AMD's MI300X chips through its Azure cloud computing service as a Nvidia alternative. In addition, AMD recently said it has had serious inquiries about building an AI cluster with over 1 million GPUs. Given that AI training clusters are typically built with a few thousand GPUs, this would be a huge win for AMD if it ever came to fruition.

While Nvidia's results are dominated by its GPU products and data center segment, the data center only accounted for 43% of AMD's total revenue, while it was 87% of Nvidia's revenue. At the same time, some of AMD's other segments struggled, which led to total year-over-year revenue growth in the quarter of only 2%, compared to 262% for Nvidia.

Which stock is the better buy?

Despite Nvidia's strong stock performance, the two stocks actually trade at nearly identical forward price-to-earnings (P/E) valuations. Nvidia trades at a forward P/E of 45.6, compared to AMD at 44.8.

Better Semiconductor Stock: Nvidia or Advanced Micro Devices | The Motley Fool (2)

NVDA PE Ratio (Forward) data by YCharts.

With the valuations so similar, the question of which is the better stock to own going forward should come down to which company will perform better operationally over the next few years.

Working in AMD's favor is that its data center segment has a much smaller base, compared to Nvidia. As the smaller company, it has the opportunity to take market share away from Nvidia. If the company can become a viable second source of GPU chips, it should see a lot of continued growth in the segment.

Meanwhile, looking five years out, the company's gaming segment, which has been a big drag, should see a huge improvement starting in 2027 or 2028. Microsoft is reportedly planning to launch its next-generation gaming console in 2028, while Sony is expected to launch its PlayStation 6 console in 2027 or 2028.

Back in 2022, AMD revenue related to the Sony PlayStation 5 (PS5) was nearly $3.8 billion, representing 16% of its revenue. Console sales typically peak their third year after launch, and the PS5 was introduced in 2020.

Working in Nvidia's favor is the moat it has created with its CUDA platform. Developers have already learned on its platform, and it takes time and training to work with other GPUs, which costs money. This should allow the company to keep its lead.

Meanwhile, AMD has started rapidly pushing innovation by developing next-generation architecture GPU platforms that will be backward compatible with its existing architecture. This should help drive huge demand from customers looking to stay at the cutting edge of AI capabilities.

If AI is still in its early innings and the data center buildout is just beginning, then Nvidia is my preferred stock to buy between the two chipmakers, given the moat it has created. However, I think AMD could also be a very solid investment, especially ahead of a gaming console refresh cycle in the next few years.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Better Semiconductor Stock: Nvidia or Advanced Micro Devices | The Motley Fool (2024)
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