Artificial intelligence (AI) has dramatically changed NVIDIA and our value proposition. (NASDAQ:NVDA) and advanced microdevices (NASDAQ: AMD).
As customers scramble to harness the power of AI, Nvidia’s AI accelerators have redefined the company and the entire semiconductor industry. In contrast, AMD has become known for catching up to its competitors technologically and is once again trying to catch up in the AI accelerator market.
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The future could bode well for both companies. Grand View Research predicts that the global AI chip industry will have a compound annual growth rate (CAGR) of 29% through 2030. Such a growth rate means that the updraft will lift all major industry players.
Nevertheless, the outlook for investors is less clear, as both stocks benefit from significant AI-driven growth. Still, given the current state of both stocks, one is likely to do better in the near future.
Nvidia stock has soared since investors discovered that Nvidia’s AI accelerator powers ChatGPT’s AI platform. This discovery led to unprecedented demand for the company’s accelerators, leaving NVIDIA unable to produce enough of these chips. As a result, the data center division that designs these chips has become Nvidia’s main focus.
To stay ahead of the competition, Nvidia continues to innovate and has just begun releasing its latest Blackwell accelerators. According to many sources, the price is rumored to be between $30,000 and $40,000 per unit, with Blackwell superchips priced as high as $70,000. Despite these prices, NVIDIA claims to capture 70% to 95% of the AI accelerator market, according to Mizuho Securities estimates.
So it will come as no surprise to investors that NVIDIA reported $91 billion in revenue for the first three quarters of its fiscal year 2025 (ending October 27), an annual increase of 135%. Nvidia’s data center division wasn’t even Nvidia’s biggest source of revenue three years ago, accounting for $80 billion, or 87% of its total revenue.
This growth pushed net income even more significantly, with profits of $51 billion in the first nine months of fiscal 2025, an increase of 190%.
Unfortunately for investors, NVIDIA’s stock price is likely to price in this growth, and some growth after that. This is not because the P/E ratio is 55x. But even with growth, investors may be hesitant because of NVIDIA’s price-to-sales (P/S) ratio of 31x.
This is a high level among fast-growing stocks, and sales growth rate in fiscal 2026 is expected to slow to 51%. Investors tend to punish stocks with slowing earnings growth, which could bode badly for Nvidia’s stock price.
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In fact, Nvidia’s struggles may motivate investors to focus on upstart competitor AMD. AMD began selling its MI300 series accelerators to counter Nvidia’s market dominance. Also, amid the need for innovation, it released the MI325X accelerator in October to compete with NVIDIA’s Blackwell product line.
It’s unclear how much business AMD will extract from Nvidia. Nevertheless, its price is widely reported to be just under $15,000, well below Blackwell’s price. Given the aforementioned AI accelerator CAGR and Nvidia’s struggle to meet demand, AMD may have a competitive niche despite not being able to match Nvidia.
However, AMD also lags behind Nvidia in terms of financial performance. In the first nine months of 2024, the company’s $18 billion in revenue increased only 10% compared to the same period in 2023.
Additionally, the data center division only accounts for 48% of revenue. The division’s revenue increased 107% year-over-year, but it still lags behind Nvidia. Still, assuming data center revenue becomes AMD’s primary source of revenue, it could also indicate further growth potential.
AMD is also much less profitable, but its net income for the first three quarters of 2024 was $1.2 billion, an increase of more than 6x for the year. While earnings have rebounded, the company’s 128 P/E ratio probably doesn’t fully reflect its valuation.
Nevertheless, its P/S ratio of 9.6 is a relative bargain compared to Nvidia, and overall growth is expected to accelerate, with revenue growth expected to reach 27% in 2025.
At the moment, it seems better to buy AMD stock. Indeed, even if Nvidia holds the dominant market share and both revenue forecasts hold true, Nvidia’s estimated 51% revenue growth rate is significantly faster than AMD’s projected 27%.
However, stock prices tend to be slow to react to slowing earnings growth. While the 51% revenue increase is impressive, it’s enough of a slowdown for investors to question Nvidia’s 31 P/S ratio.
In contrast, AMD’s revenue growth should accelerate as AI accelerators become a larger share of AMD’s revenue base. With improving earnings growth and a P/S ratio below 10, we think it’s a better buy in the current situation.
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Will Healy holds a position at Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
“Better Artificial Intelligence Stocks: Nvidia vs. AMD” was originally published by The Motley Fool.
