Advanced Micro Devices (NASDAQ:AMD) and NVIDIA (NASDAQ:NVDA) have become the two leading makers of discrete graphics processing units (GPUs). NVIDIA has long led in this field, however, in recent years, it has faced increasing competition from AMD as it makes strides in both the GPU and central processing unit (CPU) markets.

Both semiconductor stocks have risen higher in recent years. Let's see which looks like the better buy.

AMD gains on NVIDIA

AMD spent most of its history struggling to gain traction against larger rival Intel. Even today, AMD earns less than one-tenth of the total revenue of Intel.

However, under the leadership of CEO Lisa Su, AMD has built a technical lead. AMD currently sells its 7 nm chip, while Intel continues to delay the release of its own 7 nm equivalent, which now will not come out until at least 2022.

Cars driving on an urban freeway and blue lines signifying wireless linkages.

Image source: Getty Images.

However, equally notable is AMD's progress against NVIDIA. NVIDIA remains the dominant discrete GPU company, though AMD made market share gains in recent years and claims an estimated 20% of the market share versus 80% for NVIDIA. 

Product releases appear to drive fluctuations in market share. NVIDIA released the GeForce SUPER lineup this year, which likely explains its recent surge in its market share. This constitutes market share regained after losses last year when AMD released the Radeon RX 5700 GPUs, based on AMD's 7 nm RDNA architecture. Time will tell whether AMD can make lasting market share gains against NVIDIA.

One area where AMD has gained a more obvious edge is in the gaming console market, becoming the GPU of choice for Sony's PlayStation and Microsoft's Xbox. This could become a huge missed opportunity for NVIDIA.

Nonetheless, investors should not discount NVIDIA, whose stock has seen massive increases over the last five years. The company has diverted much of its attention to monetizing its graphics applications outside of gaming. The chipmaker has also enhanced its capabilities on the artificial intelligence (AI) and virtual reality (VR) fronts. Its goal is to make GPUs the "brains" of computers, robots, and self-driving cars.

Comparing the financials

In terms of market cap, NVIDIA is a much larger company, with almost $325 billion in market cap compared with AMD at about $100 billion as of this writing.

However, the gap narrows significantly when comparing annual revenue. AMD brought in just over $6.7 billion in 2019. NVIDIA's fiscal year ends in late January and in its most recent fiscal year, it brought in $10.9 billion in revenue.

Regarding valuation, both have become expensive stocks. AMD is trading at a forward P/E ratio of about 78, meaning the stock price is 78 times the earnings forecast for the year. NVIDIA's forward P/E ratio stands at about 61.

Analysts expect AMD to grow its earnings by just over 70% this year and approximately 51% in fiscal 2021. In contrast, analyst forecasts for NVIDIA call for 57% higher profits this fiscal year, with that growth falling to just under 21% the following year.

NVIDIA remains far ahead on the cash front. AMD generated $152 million in free cash flow in the most recent quarter and holds just under $1.8 billion in liquidity. NVIDIA produced almost $1.35 billion in free cash flow and has a liquidity position of just under $11 billion. NVIDIA stock has also outperformed AMD lately, although the two stocks generally moved in tandem.

NVIDIA stock began to breakout soon after the completion of its purchase of Mellanox in late April. With the purchase of Mellanox, NVIDIA will likely enhance its capabilities in the data center space, as well as AI. 

AMD Chart

AMD data by YCharts

Additionally, NVIDIA is on track to distribute just under $400 million in dividends for the year, while AMD does not offer a payout. However, at $0.64 per share in annual dividends, the yield of about 0.13% is not likely to influence investor decisions.

AMD or NVIDIA?

Although I expect both stocks to remain in growth mode for the foreseeable future, I give the edge to AMD.

It may have a slightly more expensive multiple, but AMD appears positioned to maintain a higher growth rate for a more extended period.

COVID-19 has increased the demand for chips across the board, however, AMD has experienced success on more fronts. While NVIDIA has fought back in the GPU market, AMD's sales should receive a boost after the release of the next-generation Xbox and PlayStation later this year.

Also, the technological edge AMD has gained over Intel looks poised to last for a longer time. AMD stock shot higher after Intel announced its delay on the launch of a 7 nm chip to 2022. Besides the obvious lead this delay gives AMD over Intel, the CPU market gives AMD a source of revenue outside of the GPU market. Although NVIDIA should continue to prosper, it does not appear positioned to outperform AMD.