The adoption of artificial intelligence (AI) technologies has skyrocketed since the start of last year. The debut of OpenAI's ChatGPT toward the end of 2022 wowed the tech world and highlighted the vast potential of the emerging technology. As a result, numerous companies have focused their businesses on AI, hoping to win a slice of a pie that Grand View Research forecasts will be worth nearly $2 trillion annually by 2030.
Increased demand for AI services has also increased the need for high-end chips to power them -- chips like the graphics processing units (GPUs) that Nvidia (NVDA +0.35%) and Advanced Micro Devices (AMD +0.83%) develop. Nvidia's years of dominance in GPUs allowed it to snap up an estimated 90% market share in AI chips, leading to soaring earnings and stock growth. AMD got off to a slower start in the niche, but its share price has still experienced a healthy gain since January 2023.
Both of these chipmakers are compelling investments as the AI market develops and chip demand shows no signs of slowing. But is Nvidia or AMD the better AI stock to buy in July 2024?
Nvidia
Nvidia has become a Wall Street darling since the boom in AI kicked off -- its stock is up about 745% since the start of 2023. The company is the go-to chip supplier for AI developers worldwide. Soaring demand for Nvidia's GPUs has seen its quarterly revenue and operating income climb 93% and 149% during the past four reported quarters. Meanwhile, free cash flow (what's left of cash flow after capital investments) has soared 147%.
However, the stock tumbled by more than 12% from June 17 to June 24. Some analysts have questioned whether Nvidia's stock has hit its peak. However, the company's tech dominance and vast AI potential suggest this dip will be temporary. The stock remains an investment worth considering for the long term.
NASDAQ: NVDA
Key Data Points
As a leading chipmaker, Nvidia has positions in multiple markets. In addition to powering AI models, Nvidia's chips are crucial to running cloud services, consumer products like laptops, and customer-built PCs used for activities such as gaming and video editing. Meanwhile, emerging markets like self-driving cars and virtual/augmented reality are likely to boost demand for Nvidia's hardware.
These factors, in combination with the company's lead in AI, suggest that Nvidia's stock is a must-buy.
Advanced Micro Devices
Nvidia's success in AI spurred AMD to jump into that segment of the chip business full force.
The company launched competing AI GPUs this year, and its data center revenue spiked 80% year over year in the first quarter. However, its total revenue rose just 2% during the period due to steep sales declines in other areas of its business. That result compared to Nvidia's revenue growth of 262% in the same quarter didn't do much to attract investors. AMD stock is up by just 7% year to date, while Nvidia's has jumped 125%.
NASDAQ: AMD
Key Data Points
Moreover, history doesn't bode well for AMD when it comes to its efforts to compete against Nvidia in AI. Data from Jon Peddie Research shows that during the past decade, Nvidia's market share in GPUs has risen from 65% to 88% while AMD's has declined from 35% to 12%.
Data by YCharts.
Additionally, consider the vast differences in these companies' financial growth during the past three years. Nvidia's revenue, operating income, and free cash flow have delivered triple-digit increases. Meanwhile, AMD's operating income and free cash flow have plunged, so it will have fewer financial resources to invest in its business and its efforts to compete in AI.
Is Nvidia or AMD the better AI stock in 2024?
Nvidia and AMD are at different places in their AI journeys -- one company dominates the market and the other is still trying to find its footing. Often, a contrast of this type would mean the underdog has more room to run over the long term. However, AMD has already experienced significant stock price growth even as it has produced mediocre earnings. This has left AMD's stock considerably overvalued.
Data by YCharts.
Neither Nvidia nor AMD would be considered bargain buys at their current high price-to-earnings and price-to-free-cash-flow ratios. However, Nvidia still offers the better value between the two stocks.
In addition, with Nvidia generating free cash flow of $15 billion last quarter compared to AMD's $379 million, the choice is a no-brainer. Nvidia is the better AI stock and is worth a long-term investment this year.
