Nvidia‘s (NASDAQ: NVDA) stock has experienced an astonishing surge of 2,750% over the past five years, riding the wave of explosive growth witnessed in the artificial intelligence (AI) market. Originally, Nvidia’s revenue streams predominantly came from gaming GPUs designed for PCs, but the rapid rise of generative AI platforms has led numerous companies to invest in its high-performance data center GPUs. These advanced chips are tailored to process intricate AI tasks much more efficiently compared to traditional stand-alone CPUs, marking a transformative shift in the technology landscape.
Nvidia’s pioneering position in the market has provided investors with a straightforward opportunity to benefit from the sustained expansion of the lucrative AI market, although questions linger among some investors regarding whether this hot chipmaker might hit a plateau. Alternatively, could AMD (NASDAQ: AMD), which has seen a more modest increase of 380% over the last five years, prove to be a more prudent avenue for capitalizing on the growth of the burgeoning AI market?
The differences and similarities between Nvidia and AMD
Nvidia and AMD are both fabless semiconductor companies that outsource their manufacturing to specialized third-party foundries like the esteemed Taiwan Semiconductor Manufacturing Company, yet they operate under distinctly different business models. In its most recent quarter, Nvidia derived an impressive 87% of its revenue from the data center market, focusing heavily on discrete GPUs. The remaining revenue primarily emanated from sectors including gaming, professional visualization, automotive applications, and original equipment manufacturers (OEM).
Conversely, AMD markets a variety of products, including x86 CPUs for personal computers and servers, discrete GPUs, and innovative APUs that integrate both CPU and GPU functionalities within a single package. Additionally, through its acquisition of Xilinx in 2022, AMD also markets programmable chips. In its latest quarterly report, AMD reported that 48% of its revenue came from data center operations, which includes its advanced Instinct GPUs and Epyc CPUs.
In terms of market dominance, Nvidia held a staggering 88% of the discrete GPU market at the start of the year, according to industry analysts JPR, with AMD encompassing the remaining 12%. Furthermore, TechInsights has estimated that Nvidia commanded a remarkable 98% of the data center GPU market last year, highlighting its significant advantages.
AMD continues to position itself as the underdog in the x86 CPU arena when compared to Intel. Based on figures from PassMark Software, AMD currently maintains a 36% share of the market, while Intel leads with a 61% market share. Nevertheless, AMD has been steadily gaining ground against Intel over the last eight years, as Intel has faced ongoing challenges such as chip shortages and delayed product launches.
In the GPU sector, Nvidia’s principal strategy has revolved around offering pricier yet more energy-efficient chips than those produced by AMD. In contrast, AMD typically markets lower-cost chips that, while less efficient, can still compete effectively with Nvidia’s offerings in terms of performance. This pricing strategy is reflected in the stark price difference, as Nvidia’s advanced H100 GPUs can cost approximately four times more than AMD’s MI300X Instinct GPUs.
Which chipmaker is growing faster?
Traditionally, Nvidia and AMD relied heavily on the cyclical nature of the PC market for revenue generation. However, the meteoric rise of AI-driven demand has allowed Nvidia to significantly diminish its reliance on the PC sector, which has seen a slowdown in growth over the past two years following the pandemic-related boom. On the other hand, AMD continues to face challenges due to its substantial dependence on the PC market.
From fiscal 2024 through fiscal 2027, which concludes in January 2027, analysts project Nvidia’s revenue and earnings per share (EPS) will grow at an impressive compound annual growth rate (CAGR) of 51% and 56%, respectively. This growth is largely attributed to the exceptionally strong demand for its data center chips, which consistently exceeds available supply. Despite the premium pricing of Nvidia’s chips compared to AMD’s offerings, their focus on power efficiency renders them particularly attractive to data center operators, who are grappling with substantial energy consumption.
In comparison, analysts predict AMD’s revenue will expand at a CAGR of 20% from 2023 to 2026 as the PC market stabilizes and it broadens its data center CPU and GPU offerings. On a more auspicious note, they expect its EPS to skyrocket at a 102% CAGR owing to a higher mix of higher-margin products in its sales. Additionally, as AMD scales its operations within the data center space by integrating Epyc CPUs, Instinct GPUs, and Xilinx’s programmable chips, economies of scale are expected to bolster its financial performance.
Which stock is the better value?
As it stands, neither chip stock presents a compelling bargain at the moment. Nvidia’s shares trade at 38 times next year’s estimated earnings, while AMD’s forward multiple is marginally higher at 44. Nevertheless, Nvidia appears more attractively valued in relation to its long-term growth prospects than AMD. Following the trajectory of the AI gold rush, Nvidia is poised to remain the foremost provider of essential technology, thanks to a more streamlined business model compared to AMD’s. Conversely, AMD’s position as an underdog in both the GPU and CPU markets, alongside its vulnerability to the cyclical fluctuations of the PC market, could hinder its hard-won progress in the AI sector.
Nvidia and AMD are widely regarded as superior investments within the semiconductor industry compared to Intel, but Nvidia is likely the stronger preference for those looking to capitalize on the burgeoning AI market. Its accelerated growth trajectory, focused efforts on the data center space, and its status as the go-to choice for companies aiming to modernize their AI infrastructure all underscore its compelling investment case.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.