Even as the stock market as a whole has gone on a tear, it's hard to find a hotter tech stock today than Advanced Micro Devices (NASDAQ:AMD).
After struggling for years, AMD stock has risen 75% over the past 12 months. Back that time frame up to three years, and AMD shares have rallied an incredible 211%.
Much of AMD's rally can be explained by the company's shrewd execution in recent years. The company has aggressively pursued NVIDIA (NASDAQ: NVDA) at the lower end of the booming GPU market. It has sought to challenge Intel's (NASDAQ:INTC) dominance as well.
However, as you will see in the sections below, both NVIDIA and Intel have earned leadership positions in their respective markets for a legitimate reason. And for this reason, these two names still seem more likely to thrive over the long term than AMD shares.
The undisputed leader in graphics gaming, NVIDIA is one of the few stocks that can challenge AMD's impressive rally over the past several years; its shares are up a mind-boggling over 770% over the last three years.
Right now, NVIDIA generates roughly 50% of its revenue from sales of graphics processing units (GPUs) -- computer chips that handle graphics rendering -- to high-end video game users. Here, trends like eSports and virtual reality have fueled a continued boom for powerful GPUs capable of keeping pace with the increasingly sophisticated graphics in today's games.
Gaming is also where AMD is challenging NVIDIA. In fact, AMD has intentionally positioned its Vega GPUs as a lower-cost alternative to NVIDIA's Nvidia GTX 1080 gaming chips. This doesn't appear to have hurt NVIDIA, though, as the company's gaming sales rose 51% year over year in the company's most recently reported quarter.
Looking at the big picture, much of the frenzy gripping NVIDIA stock is excitement over forthcoming uses for NVIDIA's GPUs in applications like artificial intelligence. Here NVIDIA enjoys a legitimate edge over AMD and virtually every other chip maker for structural reasons. In fact, SunTrust's William Steinrecently made the case that NVIDIA's sources of competitive advantage boil down to its strong culture of innovation, powerful software developer kits that are difficult to replicate, and continued funding of academic research around AI. For these reasons and much more, NVIDIA is certainly the better stock to own as trends like AI continue to gain prominence in the years ahead.
Whereas NVIDIA excels at making world-class GPUs, chip giant Intel dominates the worldwide market for central processing units, or CPUs, the chips that behave as the "brains" for PCs and servers. More specifically, Intel controls at least a 95% share of the global PC and server chip markets.
AMD hopes to change this dynamic by attempting to match Intel's traditional performance lead, while also undercutting Intel on price. After years of struggling as Intel's distant second fiddle, this new strategy may work in the near term for AMD. However, Intel has been able to maintain its traditional performance lead due to inherent structural advantages in its business model that should be difficult for AMD to beat over the long term.
Intel's market share dominance gives the company significant pricing power over its hardware manufacturing partners, which in turn allows Intel to generate enviable margins (61% in FY '16). This immense profitability allows Intel to reinvest more money -- in both an absolute and relative sense -- into areas like research and development (R&D) each year that help differentiate its products from the competition. As is popularly cited, Intel's $12.7 billion in R&D spending in 2016 was almost four times larger than AMD's $3.2 billion in total revenue for the same year.
Structural advantages like this are difficult to overcome, and I think that will indeed be the case for Intel and AMD. True, Intel left an opening for AMD to close the performance gap with its Kaby Lake chip generation. However, the sheer scale difference between the two companies suggests Intel will be able to consistently invent and commercialize new chip technologies faster than AMD over the long term. Like Nvidia, Intel's inherent business model advantages make it a better choice than AMD for long-term success.