A surprise development may have turned the market for artificial intelligence (AI) chips on its head. DeepSeek, a China-based start-up, developed an open-source large language model, claiming it took two months and cost less than $6 million.
Amid that news, AI chip stocks such as Advanced Micro Devices (AMD 3.05%) and Nvidia (NVDA +1.80%) plunged.
Admittedly, the dust has yet to settle, and perceptions of these stocks may change as more information comes to light. Nonetheless, with this industry possibly in flux, it brings up the question of whether AMD stock or Nvidia stock is the semiconductor stock to buy right now.
The state of AMD
At first glance, it may appear AMD is better positioned for this development. Since Nvidia is the market leader in AI accelerators, AMD has not benefited as extensively.
However, the data center segment (which designs its accelerators) has become a financial bright spot in AMD's otherwise lagging financial performance. In the first nine months of 2024, data center revenue grew 107% yearly. That comprised 48% of company revenue, up from 25% in the year-ago quarter.
Still, even though it has not outperformed Nvidia, AMD's most advanced AI accelerators have commanded significant pricing power. Hence, it is unclear how higher demand for less advanced accelerators might affect revenue for the data center segment.
Additionally, data center growth has had to compensate for the revenue drops in AMD's gaming and embedded segments, which reached 58% and 38%, respectively, over the same period.
Overall, AMD's $18 billion in revenue for the first three quarters of the year grew 10% annually. Indeed, signs have emerged that the gaming and embedded segments have bottomed. Thus, even if pricing power in the data center segment gets reduced, AMD's overall revenue picture could improve.
NASDAQ: AMD
Key Data Points
Moreover, the falling price of AMD stock has made it cheap. Struggles with profits have skewed its P/E ratio, but its forward P/E stands at just 23 at this writing. Also, with a price-to-book ratio of 3, bargain hunters may look at AMD in a new light.
Where Nvidia currently stands
For all of AMD's efforts to catch up, Nvidia remains the dominant player in the AI accelerator market, which has translated into an overall performance that has far outpaced AMD's.
In the first three quarters of fiscal 2025 (ended Oct. 27, 2024), Nvidia's revenue of $91 billion rose an astounding 135%. Approximately 87% of that came from the data center segment. With the high demand for accelerators, growth in this segment is likely the main reason for Nvidia's growth.
Unfortunately, investors have to remember that the chip industry is highly cyclical, and the news from DeepSeek could reverse those gains. Top-of-the-line AI accelerators have commanded premium prices. Should demand fall, it would force Nvidia to slash prices, which would slow or possibly reverse its massive revenue growth.
Not all of the news for Nvidia is bad. DeepSeek built its model on Nvidia H800 chips, according to multiple reports. Furthermore, Nvidia's CUDA software is still necessary for parallel computing using Nvidia GPUs. Still, if the ability to utilize Nvidia's less-advanced GPUs has increased, it bodes poorly for sales of the most advanced technology, a negative for its stock.
Amid the uncertainty brought by DeepSeek, Nvidia stock was down nearly 20% from recent highs as of the time of this writing.
NASDAQ: NVDA
Key Data Points
Indeed, Nvidia may not appear expensive with its 50 P/E ratio, but the uncertainty about DeepSeek calls the reliability of its 47 forward P/E ratio into question. Additionally, its price-to-book ratio of 43 is stratospheric by any measure, and if DeepSeek's breakthrough leads to falling revenue, Nvidia could struggle to justify such a book value multiple.
AMD or Nvidia?
Under current conditions, AMD looks like the safer bet. Indeed, it bodes well for Nvidia that the DeepSeek breakthrough occurred with its processors. Also, dominating such a market gives it a competitive advantage. Unfortunately, with improved capabilities at the lower end, the meaning of that competitive advantage becomes more uncertain.
Moreover, the DeepSeek development makes AMD more appealing to customers and investors, as the ability to build models with lower-end processors could boost demand for its accelerators. Furthermore, prospects for the recovery of its lagging sectors should draw investors back to that stock.
Ultimately, when considering Nvidia's elevated price-to-book ratio, AMD's low valuation and improved growth prospects make it the safer bet for now.
