Intel (NASDAQ:INTC) and AMD (NASDAQ:AMD) are the world's two largest producers of x86 CPUs for PCs and data centers. Intel traditionally dominates both markets, but several major mistakes have allowed AMD to gain ground in recent years.

When I compared these two chipmakers over three years ago, I declared AMD had more room to run than its larger rival. Since then, AMD's stock has surged nearly 500% while Intel's stock advanced by almost 50%. Let's see why AMD outperformed Intel by such a wide margin, and if that trend will continue over the long term.

A wafer of chips being manufactured.

Image source: Getty Images.

How did AMD overtake Intel?

Between the third quarters of 2017 and 2020, AMD's share of the entire x86 CPU market surged from 22.3% to 37.4%, according to PassMark Software. During the same period, Intel's share declined from 77.6% to 62.5%, due to losses across the desktop, laptop, and server markets.

Intel manufactures its own chips at its internal foundry. But over the past few years, Intel's foundry has struggled to keep pace with Taiwan Semiconductor Manufacturing (NYSE:TSM), the world's largest contract foundry, in the "process race" to produce smaller and faster chips, which are measured in nanometers.

AMD, however, is a "fabless" chipmaker that outsources the production of its chips to leading foundries like Taiwan Semiconductor. In late 2018, Intel's troubled development of newer 10nm chips caused a shortage of its 14nm chips -- and frustrated PC makers started placing orders with AMD instead.

AMD, which didn't face any shortages because it relied on Taiwan Semiconductor to produce its top-tier chips, happily filled those orders. AMD also advanced from 12nm chips to 7nm chips last year as Intel remained bogged down in chip shortages and production delays.

This July, Intel disclosed its 7nm process was delayed, and the first chips wouldn't launch until 2022 or 2023. Intel claims its new 10nm chips are comparable to Taiwan Semiconductor's 7nm chips -- but Taiwan Semiconductor plans to produce 3nm chips by 2022. In other words, AMD's top CPUs will likely remain smaller, more power-efficient, and more price-efficient than Intel's CPUs for the foreseeable future.

Different types of leaders with different priorities

AMD's turnaround started after Dr. Lisa Su -- a veteran engineer who previously worked at IBM, Texas Instruments, and Freescale -- took over as its CEO in late 2014.

An artist's depiction of a CPU.

Image source: Getty Images.

Under Su, AMD launched its new line of Ryzen CPUs, which addressed the poor single-threaded performance of its previous Bulldozer CPUs and expanded into the server market with its Eypc CPUs.

AMD also launched a new line of Radeon gaming GPUs to keep pace with its main rival NVIDIA (NASDAQ:NVDA), and it continued selling APUs (which combine a CPU with a GPU) for Sony (NYSE:SNE) and Microsoft's (NASDAQ:MSFT) gaming consoles.

Meanwhile, Intel struggled under its former CEO Brian Krzanich, who abruptly resigned in mid-2018 due to an inappropriate relationship with an employee. He was succeeded by Bob Swan, Intel's CFO.

Unlike Krzanich, who had an engineering background, Swan leveraged his financial background to cut costs and spend billions on buybacks instead of aggressively resolving Intel's chip development and production issues.

The growth rates and valuations

AMD's revenue and adjusted earnings rose 4% and 39%, respectively, last year, as higher sales of its CPUs and GPUs offset the slower sales of its APUs for gaming consoles -- which were slowing down ahead of the upcoming launches of Sony and Microsoft's new consoles.

But analysts expect AMD's revenue and earnings to surge 33% and 72%, respectively, this year, as it continues to gain market share against Intel in CPUs, keep pace with NVIDIA in GPUs, and sell more APUs for the PS5 and Xbox Series X and S consoles.

Based on that rosy forecast, AMD's forward P/E ratio of 45 seems like a fair premium. AMD also didn't experience significant COVID-19 disruptions, since Taiwan Semiconductor manufactures its top chips in Taiwan -- a country that was well-insulated from the global pandemic.

Intel's revenue and earnings rose 2% and 6%, respectively, last year, as the growth of its data center-oriented chips offset the sluggish growth of its PC chips. Wall Street expects its revenue to rise 4% this year as its earnings stay roughly flat, due to the higher costs of resolving its R&D and supply chain issues amid a global pandemic.

On the bright side, Intel's stock only trades at 10 times forward earnings and pays a forward yield of 2.6%. That low valuation and high dividend might limit the stock's downside potential, but investors clearly aren't optimistic about its ability to keep pace with AMD and Taiwan Semiconductor.

The winner: AMD

AMD's stock isn't cheap, but it's wiser to bet on the hungry and well-run underdog than the fading market leader. Intel's business won't fall off a cliff anytime soon, but it needs a leader who will spend more cash on chip engineering than financial engineering if it wants to stay relevant.