Nvidia vs. AMD: Which AI Chipmaker is the Better Investment?

Nvidia's (nvidia.com) stock has skyrocketed by 2,750% over the past five years, driven by the tremendous growth in the artificial intelligence (AI) sector. Previously, Nvidia made most of its revenue from graphics processing units (GPUs) for gaming. However, the surge in generative AI platforms has led many businesses to purchase its powerful GPUs designed for data centers, enabling them to handle complex AI tasks more effectively compared to traditional CPUs.

While Nvidia has capitalized on its early position in the market, some investors are beginning to question whether this chip giant can maintain its momentum. On the other hand, AMD (amd.com) has experienced a much smaller increase in stock value at 380% over the same period. This raises the question: could AMD represent a more strategic investment for those looking to benefit from the growth of the AI market?

Understanding Nvidia and AMD

Nvidia and AMD both operate as fabless companies, outsourcing their production to firms such as Taiwan Semiconductor Manufacturing Company. However, their business models differ significantly. Nvidia generates the majority of its revenue from discrete GPUs and its data center business is a massive contributor, accounting for 87% of revenue in their latest quarter. The remainder comes from sectors like gaming, professional visualization, automotive, and original equipment manufacturing (OEM).

In contrast, AMD offers a range of products including x86 CPUs for PCs and servers, discrete GPUs, and combined CPU/GPU units known as APUs. Additionally, AMD acquired Xilinx in 2022, expanding its offerings with programmable chips. In its most recent quarter, AMD saw 48% of its revenue stem from the data center sector, which includes its Epyc CPUs and Instinct GPUs.

Nvidia held a dominant 88% share of the discrete GPU market at the start of the year, while AMD captured the remaining 12%. In the data center GPU sector alone, Nvidia's presence was even more impressive, covering an estimated 98% of the market last year.

In the x86 CPU landscape, AMD competes against dominant player Intel, holding 36% of the market compared to Intel's 61%. However, AMD has steadily gained market share over the past eight years as Intel faced issues with chip shortages and production delays.

When it comes to strategy, Nvidia aims to sell high-end, power-efficient chips. On the other hand, AMD focuses on offering more competitively priced chips that still deliver good performance but may be less efficient. For instance, Nvidia's H100 GPUs are priced approximately four times higher than AMD's comparable MI300X Instinct GPUs.

Growth Rates: Who's Ahead?

Historically, both Nvidia and AMD have been heavily reliant on a cyclical PC market. However, Nvidia’s pivot towards data centers, fueled by heightened AI demand, has significantly reduced its reliance on the saturated PC market. Meanwhile, AMD continues to feel the effects of fluctuations in the PC industry.

Looking ahead, analysts project Nvidia's revenue and earnings per share (EPS) to grow at a compound annual growth rate (CAGR) of 51% and 56%, respectively, from fiscal 2024 to fiscal 2027. This growth is attributed to the relentless demand for their data center products, which are considered superior and more power-efficient.

For AMD, analysts anticipate a revenue growth of 20% CAGR from 2023 to 2026, driven by stabilization in the PC market and an expansion in its data center segment. However, AMD's EPS could see a remarkable increase of 102% CAGR due to a shift towards selling more high-margin products. This strategy may allow AMD to benefit from economies of scale as it integrates its Epyc CPUs, Instinct GPUs, and Xilinx chips.

Stock Valuation: Which is More Attractive?

As it stands, neither Nvidia nor AMD is particularly undervalued. Nvidia trades at 38 times its projected earnings for the next year, whereas AMD's ratio is higher at 44. Nevertheless, Nvidia appears more attractively priced when evaluated against its long-term growth potential. With a straightforward business model and a solid position as a leading supplier for AI developments, Nvidia is likely to continue dominating.

Ultimately, both Nvidia and AMD are seen as better investments than Intel. However, Nvidia is considered the stronger choice for investors looking to tap into the burgeoning AI sector. Its faster growth, concentration on data centers, and appeal among companies upgrading their AI infrastructure make it a compelling option.

This analysis does not constitute investment advice. Always conduct your due diligence before making investment decisions.

Nvidia, AMD, AI