Better AI Stocks: AMD vs. Microsoft

Technology stocks have been on fire over the past year thanks to the rally in artificial intelligence (AI) markets. Nasdaq Composite The index, which includes many of the world’s leading technology companies, is up 21% this year (outperforming S&P50016% growth). The launch of OpenAI’s ChatGPT in late 2022 brought renewed interest in AI and demonstrated its potential to revitalize countless industries.

As a result, the companies behind the hardware and software that enable AI have seen significant stock gains. Two companies on Wall Street’s radar are Advanced Micro Devices (NASDAQ:AMD) AND Microsoft (NASDAQ:MSFT)one of which is a leader in the design of integrated circuits, and the other provides innovative solutions that will bring artificial intelligence to the hands of millions of consumers.

These companies could have a bright future in AI, with spending in this market expected to reach nearly $2 trillion by 2030. So let’s take a closer look at these tech giants and determine whether AMD or Microsoft is a better AI investment.

Advanced Micro Devices

AMD shares up 153% since early 2023 as company fully embraces AI, spurred by rival Nvidiaa huge success in the industry. Nvidia’s profits and stock price reached record highs as its AI graphics processing units (GPUs) became the target of developers worldwide.

AMD responded by introducing competing chips to the market and made promising progress, attracting customers like Microsoft and Meta Platforms. Meanwhile, the company is taking a cue from Nvidia by moving to an annual release schedule instead of the two-year cycle it previously had. So after announcing the MI300X AI accelerator last year, the company followed suit with the MI325X in June.

AMD, however, has its work cut out for it, as Nvidia accounts for 70% to 95% of the AI ​​chip market. These companies are hardly new competitors. AMD has played second fiddle to Nvidia in the desktop GPU market for at least the past decade. Since 2014, AMD’s share of the sector has fallen from 35% to 12%, while Nvidia’s has risen from 65% to 88%.

AMD’s performance in the desktop GPU market doesn’t yet inspire much confidence in how it will fare against Nvidia in the AI ​​space. However, the industry’s rapid growth and rising demand for chips could work in AMD’s favor, giving Nvidia room to maintain its dominance and AMD finding a lucrative role in meeting supply-side demand that its rival can’t match.

Microsoft

While AMD is facing the fallout from a delayed start in AI, Microsoft is doing almost the opposite. The software king was an early investor in the industry, partnering with ChatGPT developer OpenAI in 2019. Microsoft has invested about $13 billion in the startup over the years, making it OpenAI’s largest backer.

Thanks to this cooperation, Microsoft has become a serious threat in the field of artificial intelligence, which has allowed it to gain an advantage over its competitors Amazon AND Alphabet. Access to some of the most powerful AI models in the industry has allowed Microsoft to improve many areas of its business. The company has integrated aspects of ChatGPT into its Bing search engine, monetized new AI features in its Office productivity software, and introduced generative tools to its Azure cloud platform.

Meanwhile, Microsoft’s AI efforts showed signs of paying off in the third quarter of 2024 (which ended in March). Revenue rose 17% year over year to $62 billion, beating forecasts by more than $1 billion. AI appears to be strengthening many parts of its business, with revenue in its productivity and intelligent cloud segments growing 12% and 21%, respectively.

Microsoft’s recent success has allowed it to overtake Apple as the most valuable company in the world this year. But its dominance in technology and vast financial resources indicate that it is far from reaching that ceiling.

Which AI company is better – AMD or Microsoft?

AMD and Microsoft are at very different stages of AI development: one company is still figuring out where it fits in among its competitors, while the other is finding success with increasingly established services.

Ultimately, the question of which of these companies is a better AI stock lies in their reliability. AMD’s long-term position in AI is more uncertain than Microsoft’s. Meanwhile, the chipmaker has far fewer cash reserves than Windows, which only adds to the doubts about its future.

Data by YCharts

What’s more, the chart shows that AMD stock offers significantly less value than Microsoft stock, as illustrated by its significantly higher price-to-earnings and price-to-free cash flow ratios. AMD’s earnings growth has not yet matched its share price, making it overvalued for now. Microsoft isn’t exactly a bargain, but these valuation metrics show it to be a more reasonably priced option.

Meanwhile, Microsoft’s significantly higher free cash flow suggests it’s better positioned to continue expanding into AI and keep up with its rivals. As a result, Microsoft is a better AI stock and an attractive long-term investment right now.

Is it worth investing $1000 in Advanced Micro Devices now?

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John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board. Suzanne Frey, chief executive officer at Alphabet, is a member of The Motley Fool’s board. Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board. Dani Cook has no ownership interest in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 call options on Microsoft and short $405 January 2026 call options on Microsoft. The Motley Fool has a disclosure policy.