2023 owes a lot to artificial intelligence (AI). A stock market sell-off last year dragged the Nasdaq Composite down 33%. However, excitement over AI has prompted a solid recovery, with the same index up 34% since Jan. 1.
Countless companies have benefited from AI growth, making now an excellent time to invest in the booming market before it's too late. Advanced Micro Devices (AMD 1.14%) and Nvidia's (NVDA -1.99%) stocks have soared 69% and 232% year to date, respectively, almost entirely thanks to their expansions in AI. These chipmakers will likely play crucial roles in the industry's future, developing the hardware that makes AI possible.
So, is AMD or Nvidia the better AI stock? Let's take a closer look.
Advanced Micro Devices is a rising competitor
AMD's business has exploded since its Ryzen line of central processing units (CPUs) launched in 2017. The chips have allowed it to consistently steal market share from Intel, with AMD's CPU share growing from 18% to 35% between the first quarter of 2017 and Q1 2023. Meanwhile, Intel's share fell from 82% to 63% in the same period.
The company's success has allowed it to branch out into other products, including semi-custom chips and graphics processing units (GPUs). These chip variations have led AMD to power game consoles, laptops, custom-built PCs, cloud platforms, and more, with AI being its latest venture.
For years, AMD's primary chip specialty was CPUs, with its expansion into GPUs being more recent. While the company has significantly grown its position in GPUs over the years, its business hasn't held a candle to Nvidia's dominance in the market. However, GPUs are crucial for AI development, forcing AMD to pivot its business this year.
In June, the company unveiled what it describes as its most powerful GPU to date, the MI300X. The new chips have been developed to compete directly with Nvidia's offerings and are expected to go into production in Q4 2023. What companies will sign on to use the MI300X remains to be seen. However, AMD has massive support from other tech companies that look forward to increased competition bringing down the cost of chips.
Nvidia has command of the GPU market
Nvidia has achieved a 90% market in AI chips. Its massive success in the sector is mainly thanks to its command of the discrete GPU market, where it's responsible for an 87% share. Few companies currently have chips on the market that can match the power of Nvidia's GPUs, making it a go-to for businesses venturing into AI.
After months of excitement over Nvidia's earnings potential in AI, the company's Q2 2024 (July 2023) results proved many investors right. The chipmaker's revenue jumped 101% year over year in the quarter, driven mainly by a 171% rise in data center revenue. Demand for GPUs has soared this year, and Nvidia has been perfectly positioned to profit substantially.
Additionally, the company projects a more significant revenue rise in its current quarter as it is resolving supply strains quicker than expected. The company has a looming threat from competitors such as AMD and Intel, which are both striving to develop chips that can offer equal or more power than Nvidia. However, for now, Nvidia's years of dominance in GPUs give it a more tangible position in AI.
Is AMD or Nvidia the better artificial intelligence stock?
The choice between Nvidia and AMD lies in your approach to investing. AMD is more of an up-and-comer in AI and has yet to see significant profits from the industry. It has massive potential, but its less concrete position in the sector makes it a bigger risk. However, that could mean it offers more growth over the long term. Meanwhile, Nvidia's proven track record of delivering high-performing AI chips and its recent earnings results make it a more stable way to back the high-growth industry.
Data by YCharts.
Regarding which stock is trading at a better price, the chart above shows AMD currently offers more value with its lower forward price-to-earnings (P/E) ratio of close to 40. An optimal forward P/E is often below 20, suggesting both stocks are on the expensive side and should be held for at least five to ten years minimum to get the most out of your investment. However, the metric does indicate AMD is better priced for now.
So, if you want the security of investing in an already profitable AI business, go with Nvidia. However, buy AMD stock if you're willing to take a slight risk for a potentially bigger reward over the long term.
