Nvidia or Advanced Micro Devices

Two leading companies are fighting for supremacy in the integrated circuit market: Nvidia (NASDAQ: NVDA) AND Advanced Micro Devices (NASDAQ:AMD). Both stocks have been strong over the past five years. AMD is up more than 433% during that time, which is remarkable. But that return pales in comparison to the more than 3,000% gain in Nvidia stock.

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 the revenue of AMD’s data center segment. The company’s GPUs have become the most widely used devices because of its Compute Unified Device Architecture (CUDA) software platform, which developers have long been trained to program the chips on. That, in turn, has helped create a wide moat for the company’s GPUs, giving it more than about 80% of the 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 (NASDAQ:MSFT) announced that it would offer clusters of AMD MI300X chips via its Azure cloud service as an alternative to Nvidia. Additionally, AMD recently said it had received significant inquiries about building an AI cluster with more than a million GPUs. Considering that AI training clusters are typically built with a few thousand GPUs, this would be a huge win for AMD if it ever came to fruition.

Although GPU products and the data center segment dominate Nvidia’s results, data centers accounted for only 43% of AMD’s total revenues, while it accounted for 87% of Nvidia’s revenues. At the same time, some of AMD’s other segments struggled, leading to overall year-over-year revenue growth in the quarter of just 2% compared with 262% for Nvidia.

History continues

Which stocks are a better buy?

Despite Nvidia’s stock performance, both stocks are actually trading at almost identical forward price-to-earnings (P/E) valuations. Nvidia is trading at a forward P/E of 45.6, compared to AMD’s 44.8.

With such similar valuations, the question of which stock will outperform in the future comes down to which company will outperform its operating performance over the next few years.

AMD has the benefit of having a much smaller base in the data center segment compared to Nvidia. As a smaller company, it has the potential to take market share from Nvidia. If the company can become a viable second source for GPUs, it should see significant growth in that segment.

Meanwhile, looking five years ahead, the company’s gaming segment, which has been a heavy load, is expected to see massive improvement starting in 2027 or 2028. Microsoft is reportedly planning to launch its 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.

AMD, meanwhile, has been moving quickly to innovate, developing next-generation GPU platforms that are backward compatible with existing architectures, which should help fuel massive demand from customers looking to stay up to date with 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.

Is it worth investing $1000 in Nvidia now?

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

Better Semiconductor Stock: Nvidia or Advanced Micro Devices originally published on The Motley Fool