NVIDIA (NVDA 0.35%) and AMD (AMD -2.94%) have been two of the hottest semiconductor stocks of 2020. Both stocks more than doubled, and easily outpaced the Philadelphia Semiconductor Index's gain of roughly 50%. 

But should investors expect NVIDIA and AMD to continue outperforming the broader semiconductor market next year? Let's take a fresh look at both chipmakers, and see if one is a better buy than the other.

A wafer of chips being manufactured.

Image source: Getty Images.

The key differences between NVIDIA and AMD

NVIDIA and AMD both sell GPUs and CPUs. NVIDIA generates most of it revenue from discrete (add-in) GPUs for PCs and data centers.

A smaller percentage of its revenue comes from its Tegra CPUs, which power connected vehicles, its Shield gaming devices, the Nintendo Switch, and other gadgets. The Tegra competes against similar ARM-based CPUs from Qualcomm and MediaTek. It generally doesn't compete against AMD and Intel's (INTC 0.02%) more powerful x86 CPUs, which mainly power PCs and servers.

NVIDIA agreed to buy ARM earlier this year, which will help it collect higher-margin licensing revenue from other ARM chipmakers. It also closed its acquisition of networking gear maker Mellanox earlier this year to strengthen its bundling capabilities in the data center market.

AMD generates more than two-thirds of its revenue from its CPUs for PCs and discrete GPUs. Its mainly competes against Intel and NVIDIA, respectively, in those two markets. The rest of AMD's revenue mainly comes from its Epyc CPUs for data centers, which compete against Intel's Xeons, and its custom chips for Sony and Microsoft's latest consoles.

AMD agreed to buy Xilinx (XLNX), a maker of FPGAs (field programmable chip arrays), earlier this year. That deal hasn't closed yet, but it would counter Intel's takeover of Xilinx's rival Altera in 2015. Both acquisitions complement AMD and Intel's data center businesses, since FPGAs can be reprogrammed to complement CPUs and accelerate demanding tasks like AI and machine learning.

Analyzing the tailwinds

The pandemic generated tailwinds for both NVIDIA and AMD. Demand for gaming GPUs rose as new graphically demanding games arrived and stay-at-home measures prompted people to play more video games.

A gamer plays a PC game.

Image source: Getty I mages.

The rise of remote work and online education throughout the crisis sparked a wave of fresh PC upgrades, especially in the laptop market, which boosted demand for mobile CPUs and GPUs. The surging usage of cloud services also pushed carriers to upgrade their data centers, while demanding AI tasks supported sales of high-end GPUs -- which processed those tasks faster than stand-alone CPUs.

Intel's ongoing production issues at its foundry, which caused a shortage of CPUs last year and delayed its new 7nm chips, also pushed PC makers toward AMD, which didn't suffer any shortages or R&D issues. As a result, AMD's slice of the CPU market expanded from 17.8% to 38.4% between the fourth quarters of 2016 and 2020, according to PassMark Software, as Intel's share shrank from 82.2% to 61.6%.

Which company is growing faster?

NVIDIA's revenue and adjusted EPS fell 7% and 13%, respectively, in fiscal 2020, which ended on Jan. 26. Those declines were mainly caused by the cryptocurrency bubble, which popped last year and caused miners to flood the market with cheap secondhand GPUs.

But in the first nine months of fiscal 2021, NVIDIA's revenue soared 49% year-over-year as sales of its gaming and data center chips surged. That growth offset the pandemic-induced declines at its smaller automotive and professional visualization businesses.

NVIDIA gross margin dipped slightly during that period, due to its takeover of Mellanox and a higher mix of lower-margin gaming GPUs, but its net income still grew 55%. Analysts expect its revenue and earnings to rise 51% and 68%, respectively, for the full year. Next year, its revenue and earnings are both expected to rise 21% as the pandemic-related tailwinds wane.

AMD's revenue and adjusted EPS rose 4% and 39%, respectively, last year. Its GPU business faced similar cryptocurrency issues as NVIDIA, and decelerating console sales throttled its sales of semi-custom chips. But in the first nine months of 2020, AMD's revenue rose 42% year-over-year as it sold more CPUs and GPUs for the gaming, PC, and data center markets. Its gross margin improved and its net income more than quadrupled.

Analysts expect AMD's revenue and adjusted earnings to grow 42% and 92%, respectively, this year. Next year, they expect its revenue and earnings to grow 27% and 49%, respectively, as it continues to keep pace with NVIDIA and gain ground against Intel.

The winner: AMD

Both stocks look pricey at about 50 times forward earnings, but AMD is arguably more appealing than NVIDIA, for three reasons.

First, AMD has less exposure than NVIDIA to the macro-sensitive automotive and enterprise sectors. Second, it will likely keep growing as long as Intel's comedy of errors continues. Lastly, AMD's chips power the PS5 and Xbox Series X and S consoles, which are all in high demand this holiday season.

Those catalysts, along with its better-diversified portfolio, make AMD a slightly better pick than NVIDIA right now. Both stocks should continue to outperform other slower-growth chip stocks, but investors shouldn't expect either stock to double again next year.