Better Semiconductor Stocks: Nvidia or Advanced Micro Devices

Two leading companies are fighting for chip dominance Nvidia (NVDA -0.36%) AND Advanced Micro Devices (AMD 1.72%). 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 the AI ​​chip space, as seen in the fact that its data center segment generates nearly 10 times the revenue generated by AMD’s data center segment. The company’s GPUs have become the most widely used devices because of its CUDA (Compute Unified Device Architecture) software platform, on which programmers have long been trained to program chips. This, in turn, helped create a wide moat for the company’s GPUs, giving it more than about 80% market share.

But the segment continues to grow for AMD as its GPUs become an alternative to Nvidia’s chips, of which there are few. Enterprises often like to have multiple suppliers rather than be locked into 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 stocks are a better buy?

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

NVDA PE Ratio (Forward) data by YCharts.

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.

What works to AMD’s advantage is 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 manages to become a viable second source for GPU chips, it should see significant further growth in this segment.

Meanwhile, looking five years into the future, 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 launch a next-generation gaming console in 2028, while Sony is expected to release the PlayStation 6 console in 2027 or 2028.

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

Working to Nvidia’s advantage is the moat it has created thanks to the CUDA platform. Developers have already learned on their platform, and working with other GPUs requires time and training, which costs money. This 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.