When it comes to semiconductor stocks, Nvidia seems to be the only one to talk about. I’m not particularly surprised that Wall Street remains largely bullish on Nvidia, given the ongoing launch of the company’s new Blackwell graphics processing unit (GPU) architecture.
However, behind this is the presence of Advanced Micro Devices. (AMD 1.10%) is quietly gaining some ground against Nvidia in GPUs, high-performance chips used in many artificial intelligence (AI) applications, despite the incumbent’s dominant presence. Below, I’ll break down the big picture for AMD and argue why I think AMD stock is a better buy than Nvidia over the next 10 years.
Here’s what everyone misses about AMD
The table below shows a breakdown of AMD and Nvidia’s third quarter revenue and gross profit growth.
Company Revenue Growth (% YoY) Gross Profit Growth (% YoY) AMD 18% 24% Nvidia 94% 95%
Data source: AMD and Nvidia Investor Relations.
Not only is Nvidia a much larger company than AMD, its revenue and profit margins are also growing at a much faster pace. This might suggest that AMD is far behind its rivals, but I think the growth numbers above are a bit of an illusion.
Looking at the segment results in the chart below, it’s clear that AMD’s data center business is doing well. Unfortunately, the company’s gaming and embedded divisions have seen overall declines in sales and gross profit, which is hurting the company’s overall performance.
Image source: AMD.
What’s even more encouraging is that AMD’s data center revenue is now growing at about the same rate as Nvidia’s. In other words, NVIDIA’s data center GPU business is slowing in growth, while AMD’s business is starting to show signs of expansion.
When in doubt, zoom out
According to data compiled by Jon Peddie Research, Nvidia controls a staggering 90% of the AI GPU market. AMD is a distant second with an estimated 10% market share.
Similar to the growth numbers I analyzed above, I think NVIDIA’s firm grip on the GPU market is somewhat misleading. For most of the past two years, Nvidia has had no competition in the data center GPU space. This first-mover advantage played a major role in the company’s ability to capture significant market share.
However, in December 2023, AMD introduced its MI300 series of AI accelerators to start competing more directly with Nvidia’s GPUs. In just one year, AMD was able to expand its data center GPU operations and gain enough incremental market share to inch into Nvidia’s growth.
Given that AMD already has a series of successor GPU architectures scheduled to be released between this year and 2026, I think the company is well on its way to becoming a challenger to Nvidia.
Image source: Getty Images.
AMD’s reputation is too good to ignore
To me, investing in AMD shouldn’t revolve around whether you think the company will surpass Nvidia or become a bigger player in the GPU space. Rather, if we look closely at the trends discussed throughout this article, there is good reason to believe that AMD is in the early stages of exponential growth, while Nvidia’s trajectory over the next decade could slow. I think there is.
Yet, the market seems to be completely ignoring this story. As I write this, AMD is trading at 23 times forward earnings, the lowest level in over a year.
AMD PE Ratio (Forward) Data by YCharts
In my eyes, AMD’s data center business will eventually reach a point where its accelerated growth will take over and wipe out the stagnant activity in other non-core segments such as gaming. At the same time, widespread adoption of AMD accelerators should help the company continue to gain incremental market share in the GPU space.
If this happens, the narrative surrounding AMD could change rapidly and the stock could start to see some kind of resurgence as investors flock to new growth opportunities beyond NVIDIA. I believe now is an advantageous time to take advantage of the current price movement and buy on the dip in AMD stock.
Adam Spatacco holds a position at Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
