Nvidia‘S (NVDA -0.72%) Share prices have risen 2,750% in the past five years as the artificial intelligence (AI) market exploded. Nvidia once generated the majority of its revenue from gaming GPUs for PCs, but the rise of generative AI platforms prompted more companies to buy its high-performance data center GPUs – which are used to process complex AI tasks more efficiently than standard alone CPUs.
Nvidia’s early-mover advantage made it an easy way to capitalize on the continued expansion of the booming AI market, but some investors may be wondering if the hot chipmaker will run out of steam. Could be AMD (AMD 2.36%)which generated a more modest 380% profit over the past five years, be a smarter way to capitalize on the AI market growth?
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The differences and similarities between Nvidia and AMD
Nvidia and AMD are both fantastic chipmakers that outsource their production to third-party foundries such as Taiwanese semiconductor manufacturing companybut they have different business models. Nvidia generates the majority of its revenue from discrete GPUs and relied on the data center market for as much as 87% of its revenue in the most recent quarter. The remainder of sales came primarily from the gaming, professional visualization, automotive and OEM markets.
AMD sells x86 CPUs for PCs and servers, discrete GPUs and APUs, which combine a CPU and GPU into one package. It also sells programmable chips through Xilinx, which it acquired in 2022. In the latest quarter, AMD generated 48% of its revenue from its data center segment, which sells its Instinct GPUs and Epyc CPUs.
According to JPR, Nvidia had 88% of the discrete GPU market at the beginning of this year, while AMD had the remaining 12%. TechInsights estimates that Nvidia had a whopping 98% of the data center GPU market last year.
AMD is also an underdog in the x86 CPU market compared to Intel. According to PassMark Software, AMD currently has 36% of that market, while Intel has a 61% share. However, AMD has gained ground against Intel over the past eight years as its larger competitor struggled with persistent chip shortages and delays.
In the GPU market, Nvidia’s main strategy has been to sell more expensive, but more energy efficient chips than AMD. AMD typically sells cheaper but less energy efficient chips that can offer similar performance to Nvidia’s chips. That’s why Nvidia’s H100 GPUs currently cost about four times more than AMD’s comparable MI300X Instinct GPUs.
Which chipmaker is growing faster?
In the past, Nvidia and AMD were heavily dependent on the cyclical PC market. However, the rapid AI-driven expansion of Nvidia’s data center business reduced its exposure to the PC market — which slowed over the past two years as the company exited its stay-at-home growth spurt during the pandemic. AMD, which is still heavily dependent on the PC market, faced more headwinds.
From fiscal 2024 to fiscal 2027 (which ends in January 2027), analysts expect Nvidia’s revenue and earnings per share (EPS) to grow at a compound annual growth rate (CAGR) of 51% and 56%, respectively, as market demand for the data center chips continue to outpace available supply. Nvidia’s data center chips are more expensive than AMD’s, but its focus on energy efficiency still makes it the more attractive choice for data center operators, who consume enormous amounts of power.
Analysts expect AMD’s revenue to grow at a CAGR of 20% between 2023 and 2026 as the PC market stabilizes and its CPU and GPU operations expand in data centers. But ultimately, they expect earnings per share to rise to a CAGR of 102% as it sells a higher mix of higher-margin chips. Economies of scale should also apply to AMD’s data center business, as it bundles its Epyc CPUs, Instinct GPUs and Xilinx programmable chips.
Which stock is the better value?
None of these chip stocks are a buy right now. Nvidia trades at 38 times next year’s estimated earnings, while AMD has a higher forward multiple of 44. Still, Nvidia appears to be more fairly valued relative to its long-term growth potential than AMD. Nvidia should remain the top seller of picks and shovels for the AI gold rush for the foreseeable future, and it has a much simpler business model than AMD. AMD remains an underdog in both the GPU and CPU markets, and its exposure to the cyclical PC market could offset hard-won gains in the AI market.
Nvidia and AMD are both better investments in the semiconductor sector than Intel, but I think Nvidia still makes a stronger choice for the growing AI market than AMD. Nvidia is growing faster, is more focused on the data center market, and will likely remain the top choice for companies looking to upgrade their AI infrastructure to support the latest AI applications.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: Short November 2024 $24 Calls on Intel. The Motley Fool has a disclosure policy.
