Better Semiconductor Stocks: Nvidia or Advanced Micro Devices

Two leading companies are fighting for supremacy in the integrated circuit market: Nvidia (NVDA -0.36%) AND Advanced Micro Devices (AMD 1.72%). Both companies have performed well over the past five years. AMD has gained more than 433% during that time, which is a great result. But that return pales in comparison to the more than 3,000% gain in Nvidia shares.

Nvidia has been the better company over the last five years, but which company is likely to outperform over the next five years?

Nvidia vs AMD

Currently, the development of artificial intelligence (AI) infrastructure benefits both companies, given the demand for graphics processing units (GPUs) needed to support large language model (LLM) training and artificial intelligence (AI)-based reasoning. This insatiable demand for GPUs led Nvidia’s data center segment to report first-quarter fiscal 2025 revenues of $22.6 billion (for the quarter ending April 28, 2024), an incredible 427% year-over-year growth . Meanwhile, AMD’s data center segment revenues in the first quarter of fiscal 2024 grew more than 80% year-over-year to $2.3 billion.

Nvidia has become the clear leader in AI chips, with its data center segment generating nearly 10 times more revenue than AMD’s data center segment. The company’s graphics processors have become the primary ones used, thanks to the CUDA (Compute Unified Device Architecture) software platform, on which programmers have long been trained to program the chips. This, in turn, helped create a wide moat for the company’s GPUs, giving it over 80% market share.

But the segment continues to thrive for AMD as its GPUs become an alternative to Nvidia’s chips, which are in short supply. Companies often like to have multiple suppliers to avoid becoming dependent on one.

AMD is making some progress. Last month, Microsoft (MSFT -1.30%) announced that it will offer clusters of AMD MI300X chips via its Azure cloud computing service as an alternative to Nvidia. Additionally, AMD recently announced that it has serious inquiries to build an AI cluster with over one million GPUs. Considering that AI training clusters are typically built with several thousand GPUs, this would be a huge win for AMD if it ever came to fruition.

While Nvidia’s results are dominated by its GPU products and data center segment, data centers only accounted for 43% of AMD’s total revenue, while they accounted for 87% of Nvidia’s revenue. At the same time, some of AMD’s other segments struggled, leading to total year-over-year revenue growth in the quarter of just 2%, compared to 262% for Nvidia.

Which stock is a better buy?

Despite Nvidia’s strong stock performance, both stocks are actually trading at nearly identical projected price-to-earnings (P/E) valuations. Nvidia is trading at a projected P/E of 45.6, while AMD has a P/E of 44.8.

NVDA PE Ratio (Forward) data by YCharts.

Given such similar valuations, the question of which stocks to own going forward should come down to which company will deliver better operating results over the next few years.

What works to AMD’s advantage is the fact that its data center segment has a much smaller base compared to Nvidia. As a smaller company, it has a chance to take market share from Nvidia. If the company can become a viable second source for GPUs, it should see significant growth in this segment.

Meanwhile, looking five years from now, the company’s gaming segment, which has been a major drag, is expected to see a huge improvement starting in 2027 or 2028. Microsoft is reportedly planning to release a next-generation gaming console in 2028, while Sony The PlayStation 6 console is expected to launch in 2027 or 2028.

In 2022, AMD’s revenue related to the Sony PlayStation 5 (PS5) console was nearly $3.8 billion, accounting for 16% of its revenue. Console sales typically peak in the third year after launch, and the PS5 launched in 2020.

Nvidia has the moat it has created with its CUDA platform to its advantage. Developers have already learned on its platform, and working with other GPUs takes time and training, which costs money. That should allow the company to maintain its leadership position.

Meanwhile, AMD began innovating rapidly, developing next-generation GPU platforms that would be backwards compatible with existing architecture. This should help drive massive demand from customers looking to stay on top of cutting-edge AI capabilities.

If AI is still in its early stages of development and data center expansion is just beginning, then Nvidia is my favorite stock buy of the two chipmakers given the advantage it has created. However, I think AMD could also be a very solid investment, especially ahead of the game console refresh cycle over the next few years.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 call options on Microsoft and short January 2026 $405 call options on Microsoft. The Motley Fool has a disclosure policy.